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Author: 


Saint  Louis  (iVIo.) 


Title 


Report  of  St.  Louis  Public 
Service  Commission  to... 

Place: 

St.  Louis 

Date: 

1911 


COLUMBIA  UNIVERSITY  LIBRARIES 
PRESERVATION  DIVISION 

BIBLIOGRAPHIC  MICROFORM  TARGET 


ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


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St.  Louis.    Public  service  commission. 

Report  of  St.  Louis  Public  service  commission  to  the 
Municipal  assembly  of  St.  Louis  on  rates  for  electric 
light  and  power.  St.  Louis,  Mo.  rNixon-Jones  printinir 
CO.]  1911. 

81,  39,  32,  21  p.  incl.  tables,  diagrs.    fold,  chart.    23J*-. 

J.  L.  Hornsby,  chairman. 

Appendices :  a.  History  of  the  companies  preceding  the  Union  electric 
light  &  power  co.  no.  2.— b.  and  c.  Analysis  of  rate  calculations  for  electric 
light  and  power.  Rate  calculations  for  electric  light  and  power  (Reports 
by  James  E.  Allison,  commissioner  and  chief  engineer) 

^   IJSlectric  lighting— Rates.    2.  Electric  power— Rates.    3.  Electric  in- 
dOstries— St.  Louis.        i.  Hornsby,  Joseph  L.    ii.  Allison,  James  E. 


Library  of  Congress 


n 


(351)1, 
TK25.S2A3 


1911 


11-9083 


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RESTRICTIONS  ON  USE: 


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BIBLIOGRAPHIC  IRREGULARITIES 


MAIN  ENTRY:    St.  Louis  rMo.) 


Report  of  St.  Louis  Public  Service 


Bibliographic  Irregularities  in  the  Original  Document: 

List  all  volumes  and  pages  affected;  include  name  of  institution  if  filming  borrowed  text. 


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pages  16-24  and  28  -  32  of  Appendix  B 
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REPORT 


OF 


St.  Louis  Public  Service 
Commission 


TO 


THE  MUNICIPAL  ASSEMBLY 
OF  ST.  LOUIS 

ON  RATES  FOR 

Electric  Light  and  Power 


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OF  ST.  LOUIS 


ON  RATES  FOR 


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Summary  of  Conclusions  and  Recommendations. 

Maximum  rate,  nine  and  one-half  cents  per  kilowatt  hour. 

Minimum  bill,  for  consumers  paying  maximum  rate,  fifty 
cents  per  month. 

Minimum  bill  for  all  other  consumers,  one  dollar  per  month. 

Guarantees  abolished  except  in  cases  necessitating  special 
investment. 

Depreciation  charge,  hwe  per  cent  per  annum. 

Net  return  above  depreciation  charge  on  property  in  the 
service  of  general  consumers,  eight  per  cent  per  annum. 

Earning  value  of  property  in  service  of  general 

consumers $13,441,360 

Earning  value  of  property  in  service  of  United 

Railways  Co 2,693,033 

Total  Earning  Value $16,134,393 

Within  a  few  days  of  the  printing  of  this  report,  the  Com- 
pany has  submitted  a  statement  of  additions  to  property,  from 
^he  date  of  the  Commission's  inventory,  to  January  1st,  1911. 

Making  the  additions  according  to  this  statement  to  figure 
before  depreciation  in  Table  XXVIII,  the  result  is: 

Total  value  as  of  January  1,  1911,  (unde- 
preciated for  condition) $17,857,078 


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REPORT 

OF 

St*  Louis  Public  Service  Commission 

TO 

THE   MUNICIPAL  ASSEMBLY  OF   ST.  LOUIS 

ON  RATES  FOR 

ELECTRIC  LIGHT  AND  POWER 


St.  Louis,  Mo.,  February  17th,  1911. 

To  the  Municipal  Assembly  of  the  City  of  St.  Louis : 

The  Public  Service  Commission  respectfully  reports  that  in 
compliance  with  the  duties  imposed  on  it  by  ordinance  "to 
make  investigations  into  all  facts  and  matters  tending  to  show 
the  just  and  reasonable  rates  charged  for  the  services  of  all  per- 
sons, firms  and  corporations  mentioned  in  the  ordinance,  and  to 
report  to  the  Municipal  Assembly  its  findings,  together  with  rec- 
ommendation of  what,  in  its  opinion  constitutes  a  reasonable 
rate  of  charge  for  such  service  in  the  City  of  St.  Louis,"  it  has 
made  such  investigation  with  reference  to  the  rates  for  electric 
lighting,  heating  and  power,  and  herewith  submits  the  fol- 
lowing as  the  result  of  its  investigation: 

The  business  of  furnishing  electric  light  and  power  in  the 
City  of  St.  Louis  is  carried  on  by  the  Union  Electric  Light  and 


< 


6 


Report. 


Power  Company,  which  for  the  time  being  has  a  practical 
monopoly,  for  while  the  franchises  under  which  it  operates 
give  it  no  legal  monopoly,  the  only  others  who  supply  electric 
current  to  the  public  are  the  Laclede  Gas  Light  Co.,  the  Cupples 
Station  Light,  Heat  &  Power  Co.,  and  the  West  End  Light, 
&  Power  Co.  The  Union  Electric  Light  and  Power  Company 
has  at  present  a  capacity  of  65,200  K.  W.  and  its  output  to  bus 

in  the  year  1910  was  approximately  140,000,000  K.  W.  H. 
The  Laclede  Gas  Light  Co.,  is  the  only  one  of  the  other  com- 
panies which  can  claim  to  have  any  distribution  system,  and 
it,  since  the  destruction  of  its  plant  by  fire  some  years  since, 
acquires  by  purchase  from  the  Union  Electric  Light  and  Power 
Co.,  all  the  electric  current  which  it  furnishes  to  its  customers, 
amounting  in  the  year  1910,  in  the  aggregate  to  approximately 
6,000,000  K.  W.  H.  It  has,  however,  at  present  a  new  plant 
in  course  of  construction.  The  Cupples  Station  Light,  Heat 
and  Power  Co.,  furnishes  electric  current  only  to  the  Cupples 
Station  block  and  immediate  vicinity;  its  output  in  the  year 
1910  being  approximately  500,000  K.  W.  H.  The  West  End 
Light  &  Power  Co.,  with  a  plant  located  in  the  residence  sec- 
tion of  the  city,  of  comparatively  small  capacity,  recently  com- 
menced operation,  and  has  as  yet  a  very  limited  distribution 
system.  The  Commission  therefore,  is  of  the  opinion  that  a 
consideration  and  determination  of  a  just  and  reasonable  rate 
to  be  charged  by  the  Union  Electric  Light  and  Power  Com- 
pany, would  be  a  proper  basis  for  establishing  rates  generally, 
for  electric  light  and  power  in  the  city. 

The  Union  Electric  Light  and  Power  Company  (No.  2)  was 
incorporated  on  September  9,  1903,  under  the  General  Laws  of 
the  State  of  Missouri,  for  the  purpose  of  manufacturing,  dis- 
tributing, and  vending  light,  heat  and  power  within  and  with- 
out the  City  of  St.  Louis. 

The  Company  was  formed  by  a  consolidation  of  the  Union 
Electric  Light  and  Power  Company  (No.  1),  of  St.  Louis,  with 
the  Missouri  Edison  Electric  Light  and  Power  Company,  of  St. 
Louis,  corporations  of  the  state  of  Missouri,  operating  at  the 
date  of  consolidation  under  ordinances  of  the  City  of  St.  Louis, 
and  claims  to  hold  rights,  privileges  and  franchises  owned  by 
the  two  consolidated  companies  aforesaid  and  acquired  by  them 
from  predecessor  companies,  as  follows: 


\  ■ 


Brush  Electric  Association. . 

Excelsior  Electric  Company 
(Guernsey  &  Scudder  Elec- 
tric Light  Co.) 

St.  Louis  Western  Electric 
Light  Co.  (F.  L.  Johnson) 

St.  Louis  Thomson-Hous- 
ton Electric  Light  Co.,  sub- 
sequently  

United  Electric  Co 

Municipal  Electric  Lighting 
&  Power  Co.  (St.  Louis 
Illuminating  Co.) 

Edison  Illuminating  Co.  of 
St.   Louis 

Do.    Permit    under 

Missouri  Electric  Light  & 
Power  Co 

St.  Louis  Electric  Light  & 
Power  Co.  (St.  Louis  Elec- 
tric Power  Co.) 

Do.     Permit  under 

Electric  Light,  Power  & 
Conduit  Co. — Permit  under 


Report. 

Under 

Ordinance. 
12723 


Acceptance 
Filed. 
April    5,  1884 


12723 
12723 


12723 
12723 


12723 


June  23,  1885 
March  4,  1887 


April    3,  1884 
July    17,  1889 


12723 
18680 


Oct.    31,  1892 
12723        Feb.     4,  1889 


12723 
18680 

18680 


Bond 
Filed. 
April    5,  1884 


June  23,  1885 
Mar.  17,  1887 


April  12,  1884 
Aug.   30,  1889 


July  1,  1885 

Nov.  2,  1892 

Feb.  28,  1889 

July  18,  1888 


All  of  the  foregoing  franchises  having  been  acquired  by  the 
Missouri  Edison  Electric  Co.,  by  purchase  or  by  merger,  direct- 
ly or  indirectly,  from  said  companies. 

And  through  Union  Electric  Light  and  Power  Co.  (No.  1) 
franchise  rights  of  tne  following  companies  : 

Imperial  Electric  Light,  Heat 
and  Power  Co.  (No.  1) . . . 

Imperial  Electric  Light,  Heat 
and  Power  Co.  (No.  2) . . . 

Permit  under 

Citizens  Electric  Lighting 
and  Power  Co 

Seckner  Contracting  Co 

Carondelet  Electric  Light  & 
Power  Co 

Vo  Stock  Ownership  of  Na- 
tional Subway  Co 

As   amended   by 

And  by  direct  purchase  by  the  Union  Electric  Light  and 
Power  Co.  No.  2,  the  franchise  rights  of  the  Edison  Electric 
Illuminating  Co.  of  Carondelet  acquired  in  the  purchase  in 
1907  of  the  property  of  the  Laclede  Power  Co. 

Ordinance  12723  was  accepted  by  the  companies  named  as 
holding  permits  thereunder,  prior  to  its  amendment  by  Ordi- 
nance 16894  approved  October  26,  1892,  except  the  Edison  Il- 
luminating Company  of  St.  Louis,  which  filed  its  acceptance  of 
Ordinance  12723  after  its  amendment  by  Ordinance  16894. 


••••••••••••* 

18680 

12723 
19892 

Oct. 

7,  1892 

Oct.   8,  1892 

12723 
14798 

Feb. 

10,  1891 

Mar.  18,  1891 

15953 

i 


'^: 


8 


Report. 


Report. 


9 


All  the  Companies  named  herein  as  operating  under  Ordin- 
ance No.  18680  (Keyes  Ordinance)  have  taken  out  permits 
under  said  ordinance. 

There  does  not  appear  on  record  any  special  or  direct  grant 
by  city  ordinance  of  any  franchise  or  right  to  any  of  the  Com- 
panies heretofore  named,  the  franchise  rights  possessed  by 
them  being  obtained  by  virtue  of  the  general  ordinances  refer- 
red to,  and  of  the  permits  granted  them  by  the  Board  of  Public 
Improvements  under  the  terms  of  such  ordinances. 

The  history  of  the  Union  Electric  Light  and  Power  Company 
and  the  Companies  whose  rights  and  franchises  it  claims  to 
hold,  is  the  history  of  the  introduction  and  installation  of  elec- 
tricity as  a  means  of  furnishing  light,  heat  and  power  to  the 
inhabitants  of  St.  Louis. 

An  interesting  historical  sketch  and  illustrative  chart  of  these 
predecessor  Companies  was  furnished  to  the  Commission  by  the 
Union  Electric  Light  and  Power  Co.,  as  part  of  the  report  of  its 
expert  accountants,  and  is  printed  herewith  as  Appendix  A. 

Owing  to  the  somewhat  peculiar  character  of  the  Public  Ser- 
vice Commissions  under  the  laws  of  the  State  in  that  they  do 
not  make  their  investigations  at  the  special  demand  or  upon 
complaint  of  any  citizen  against  any  particular  branch  of  pub- 
lic service  or  corporation,  it  devolves  upon  the  Commissions  to 
obtain  for  themselves  all  the  facts  necessary  to  be  had  in  the  in- 
vestigations undertaken  by  them. 

The  Commission  feels  that  it  is  due  to  the  Union  Electric 
Light  and  Power  Company,  however,  to  state  that  it  has  co-op- 
erated with  the  Commission  in  every  way  in  the  present  investi- 
gation, not  only  affording  the  Commission  access  to  its  books 
and  papers  and  giving  the  Commission  all  the  information  at 
its  command,  and  presenting  much  testimony  at  the  public 
hearings  held  for  this  purpose,  but  further  by  having  had  a 
complete  financial  history  of  the  present  Company  and  its  pre- 
decessors prepared  by  well  known  expert  accountants.  All  of 
this  has  greatly  facilitated  the  work  of  the  Commission  and  ma- 
terially lessened  the  expense  of  this  investigation. 

VALUATION. 

The  justice  of  public  regulation  of  the  service  and  charges 
of  public  utilities  Companies,  especially  in  cities,  is  based  upon 
the  assumption  that  there  is  always  an  obligation  expressed  or 


< 


implied,  that  in  return  for  the  use  of  the  streets  and  other 
privileges,  the  owners  of  public  utilities  are  bound  to  furnish 
good  service  at  reasonable  prices,  and  that  reasonable  prices 
mean  prices  which  will  yield  no  more  than  a  reasonable  return 
on  the  money  properly  invested  in  the  service  of  the  public. 

In  seeking  to  determine  then,  what  service  can  justly  be  de- 
manded of  a  public  utility,  and  what  prices  should  be  charged 
for  that  service,  it  must  first  be  decided  upon  what  amount  of 
invested  capital  it  is  right  that  the  Company  should  earn  re- 
turns. 

It  is  evident  that  the  determination  of  the  value  of  the  in- 
vestment to  be  earned  on,  which  we  will  call  the  Earning 
Value,  is  of  grave  importance  in  arriving  at  just  measures  of 
regulation,  and  great  care  must  be  exercised  in  determining  the 
items  to  be  included  in  it,  in  selecting  the  methods  of  valua- 
tion and  in  applying  these  methods  to  the  facts  and  data  avail- 
able in  the  case  under  consideration. 

It  is  evident  that  the  Earning  Value  cannot  be  measured 
by  the  face  value  of  the  bonds  and  capital  stock  issued  by  the 
Company,  for  the  issue  of  securities  by  public  service  corpora- 
tions has  frequently  been  known  to  bear  but  small  relation  to 
the  real  amount  of  capital  actually  invested  in  the  business,  and 
to  assume  such  a  measure  of  value  without  investigation,  would 
be  a  failure  of  duty  on  the  part  of  a  Public  Service  Commission. 

Neither  can  the  true  Earning  Value  be  measured  by  the 
market  value  of  the  securities,  for  this  market  value  is  gener- 
ally based  largely  upon  the  earning  power  of  the  plant,  and  the 
earning  power  in  turn  is  based  in  great  part  upon  the  charges 
which  the  Company  is  able  to  make  to  the  consumer.  The 
charges  to  the  consumer  may  be  excessive  and  the  Company 
may  be  earning  exorbitant  profit,  or  the  reverse  may  be  the  case 
and  the  Company  may  be  losing  money. 

The  fact  is  that  the  justice  or  injustice  of  the  charges  to  the 
consumer  is  the  principal  object  of  investigation,  and  if  it  is 
admitted  at  the  start  that  a  valuation  based  upon  the  unrestrict- 
ed Earning  Power  of  the  plant  is  to  be  taken,  then  there  is  noth- 
ing to  regulate,  and  there  can  be  no  such  thing  as  unjust  charges 
for  public  service. 

If  accounts  were  always  accurately,  intelligently  and  prop- 
erly kept;  if  the  property  were  always  charged  off  when  de- 
stroyed or  worn  out;  if  accurate  entries  were  always  made  of 


T 
f 


10 


Eeport. 


new  property  bought ;  if  correct  charges  were  always  made  for 
depreciation;  if  proper  distinction  were  always  made  between 
tangible  and  intangible  property,  and  if  records  and  vouchers 
were  never  lost  or  destroyed,  then  it  would  be  possible  to  de- 
termine the  value  of  a  property  from  an  accountant's  report; 
but  unfortunately  this  is  seldom  if  ever  the  case,  and  even 
where  the  books  are  admirably  accurate  as  a  record  of  the 
value  of  the  property,  they  can  only  be  proven  to  be  so  by  care- 
ful checking  with  a  detailed  inventory  and  appraisal  of  the  tan- 
gible property  together  with  a  conservative  estimate  or  determi- 
nation of  allowable  value  for  intangible  property. 

Before  setting  forth  the  methods  adopted  and  the  results  ar- 
rived at  by  the  Commission  in  determining  the  Earning  Value 
of  the  property  of  the  Union  Electric  Light  and  Power  Com- 
pany, it  may  be  best  to  analyze  the  Earning  Value  claimed  by 
the  Company  as  the  proper  basis  upon  which  to  fix  the  fair 
return. 

These  values  have  been  presented  to  the  Commission  in  two 
separate  statements  and  the  claims  of  each  one  based  upon 
separate  and  distinct  theories. 

EARNING  VALUE  AS  PRESENTED  BY  THE  COMPANY. 

Continuous  Property  Theory. 

The  first  presentation  by  the  Company  of  claims  for  value  of 
the  investment  to  be  earned  on  is  set  forth  in  detail  in  the  re- 
port of  the  Company's  accountants,  and  as  presented  to  the 
Commission,  it  fills  two  rather  bulky  volumes  and  is  much  too 
voluminous  to  be  printed  in  full  in  this  report. 

The  Company  accountant's  report  shows  a  figure  for  the 
cost  of  the  property  built  up  in  accordance  with  their  own 
plan  of  adjustment  and  selection  of  the  accounts  of  the  Union 
Electric  Light  and  Power  Company  and  predecessor  or  former 
Companies  engaged  in  the  business  in  St.  Louis,  and  extends 
over  a  period  of  twenty  years,  beginning  in  1889,  and  assumes 
that  the  present  property,  and  in  effect  that  the  present  Com- 
pany, is  a  continuous  entity  almost  from  the  beginning  of  the 
electric  light  and  power  business  in  St.  Louis. 

The  summary  of  the  conclusions  of  the  report  is  given  in 
Table  I.  showing  the  cost  of  the  property  as  arrived  at  by  their 
methods. 


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Company's  accountants  built  up  a  figure  of  the  cost  of  the 
property  on  what  is  known  as  the  Continuous  Property  Theory. 

As  shown  by  the  Company's  accountants,  the  results  of  the 
application  of  this  theory  are  given  in  Tables  II.,  III.,  IV., 
V.  and  VI. 


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at 
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during  year. 

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1,851 

4,972 

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in  return 
added  to 

Investment. 

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at  6% 

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for    return. 

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Net    Charge 

per 
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18 


Report. 


The  calculations  resulting  in  these  tables,  as  in  Table  I.,  are 
based  upon  assumptions  of  cost  as  selected  from  the  books  or 
other  records  of  old  Companies  and  the  present  Company,  and 
upon  the  Continuous  Property  Theory. 

The  theory  as  it  is  interpreted  by  the  Company's  account- 
ants, is  that  from  its  beginning,  a  Company  is  entitled  to  earn 
and  distribute  in  interest  or  dividends,  a  certain  percentage 
upon  its  investment  over  ^nd  above  all  charges,  including  a 
proper  amount  for  depreciation. 

If  in  any  year  it  earns  and  distributes  more  than  this  al- 
lowed percentage,  then  the  surplus  is  to  be  deducted  from  the 
capital  invested. 

If  in  any  year  it  earns  and  distributes  less  than  this  al- 
lowed percentage,  then  the  deficit  is  to  be  capitalized. 

The  Commission  has  given  much  care  and  study  to  the  con- 
sideration of  this  accountants'  report,  and  the  more  study 
given  to  it  the  less  does  it  appear  a  safe  or  reasonable  guide  to 
a  value  upon  which  the  Company  should  be  allowed  to  earn 
returns. 

The  report  in  part  is  founded  upon  items  taken  from  the 
books  of  extinct  Companies  whose  methods  of  accounting  may 
or  may  not  have  been  accurate.  Some  of  the  items  are  not 
taken  from  books  of  account,  but  are  built  up  from  figures 
found  in  records  of  stockholders'  meetings,  and  some  of  the 
items  treated  in  the  report  on  the  same  basis  as  cash  transactions 
are  the  result  of  stock  and  bond  operations  in  which  the  assigned 
value  of  the  securities  traded  in  may  or  may  not  represent  real 
values. 

In  a  number  of  instances,  according  to  the  report,  where  rival 
Companies  have  been  acquired,  prices  have  been  paid  €or  them 
which  in  the  judgment  of  the  Commission,  were  in  excess  of 
their  real  value  as  measured  by  their  investment  in  the  actual 
service  of  the  public. 

The  Commission  does  not  wish  to  be  understood  as  taking 
the  ground  that  all  the  items  presented  in  the  accountants'  re- 
port are  considered  as  unavailable  in  establishing  the  true  cost 
of  the  property.  In  fact  a  great  number  of  the  items  are  un- 
doubtedly accurate,  especially  in  the  period  covered  by  the  exis- 
tence of  the  present  Company,  but  the  necessarily  problemati- 
cal basis  of  some  of  the  items  obtained  from  the  books  and 


^ 


f 


Report. 


19 


other  records  of  the  older  Companies  render  them  unavailable 
for  the  present  purpose  and  hence  destroy  the  value  of  the  re- 
sults of  calculation  based  upon  them. 

In  rejecting  these  figures  the  Commission  wishes  to  state 
most  emphatically  that  it  intends  no  reflection  upon  the  sin- 
cerity of  the  Company's  accountants,  or  upon  the  Company  in 
presenting  them.  The  presentation  has  been  made  with  the 
utmost  candor,  and  a  great  part  of  the  reasons  for  rejecting  the 
results  can  be  gathered  from  the  report  itself. 

In  addition  to  being  unable  to  accept  the  figures  as  a  whole, 
as  presented  in  the  accountants'  report,  the  Commission  is  un- 
able to  accept  the  theory  upon  which  their  use  is  based. 

It  does  not  appear  just  or  even  practicable  to  include  in  a 
calculation  designed  to  arrive  at  an  Earning  Value  of  the  prop- 
erty at  present  in  the  service  of  the  public,  the  operations  of 
practically  all  the  various  Companies  engaged  in  the  electric 
lighting  and  power  business  of  St.  Louis,  from  its  beginning 
nearly  a  quarter  of  a  century  ago. 

In  regard  to  the  Continuous  Property  Theory  as  applied  to 
the  figures  in  Tables  II.,  III.,  IV.,  V.  and  VI,  in  which  the  de- 
ficit below  a  fair  return  on  the  assumed  investment  for  each 
year  is  added  to  the  capital  to  be  earned  on  and  the  surplus,  if 
any,  is  deducted,  the  Commission  believes  that  while  such  a  cal- 
culation may  be  valuable  for  obtaining  certain  data  for  measur- 
ing the  cost  of  establishing  a  new  business,  yet,  even  assum- 
ing the  correctness  of  the  basic  figures,  the  theory  cannot 
justly  be  applied  in  the  manner  shown  here  without  very  im- 
portant modification  and  limitations. 

The  Commission  believes  that  as  a  public  service  question, 
the  period  during  which  a  deficit  should  be  allowed  to  be  cap- 
italized as  cost  of  establishing  a  business  should  be  limited  to  a 
reasonable  time  at  the  beginning  of  a  new  business,  and  it 
must  also  be  assumed  that  there  was  a  reasonable  demand  for 
the  utility  when  built,  and  that  the  property  was  well  managed 
during  the  period  of  deficit. 

It  is  evident  that  if  such  limitations  to  the  theorv  are  not 
considered,  a  utility  might  be  established  long  before  there 
could  possibly  be  a  demand  to  justify  the  investment,  or  might 
be  built  where  ruinous  competition  is  sure  to  take  place,  and 
that  the  results  of  such  bad  judgment,  and  of  possibly  long 


20 


Report. 


periods  of  bad  management  not  easily  detected,  might  ulti- 
mately be  placed  as  a  perpetual  burden  upon  the  consumers. 
In  short,  the  application  of  the  Continuous  Property  Theory  in 
its  purity  and  without  limitation  would  amount  to  a  guarantee 
of  the  investment  by  the  public,  in  which  case  of  course,  all 
risk  to  the  investor  being  in  the  end  eliminated,  the  return  al- 
lowable would  logically  be  reduced  to  a  figure  somewhat  ap- 
proaching the  ordinary  return  on  municipal  securities. 

The  reverse  application  of  the  theory  (i.  e.  supposing  the  util- 
ity to  have  made  a  surplus  over  reasonable  return),  might,  if 
applied  to  a  company  which  had  been  very  successful  in  the 
past,  result  in  a  complete  confiscation  of  the  property.  This 
of  course,  is  merely  an  academic  point,  as  the  courts  would  not 
allow  a  reduction  of  value  on  account  of  former  profits,  but  it 
serves  to  illustrate  the  fact  that  the  application  of  the  Contin- 
uous Property  Theory  without  limitations  might  easily  place 
an  unjustifiable  burden  upon  the  consumer  through  the  losses  of 
the  business,  but  there  would  be  small  chance  of  his  being  bene- 
fited should  the  business  have  proven  very  successful. 

This  Continuous  Property  Theory  was  presented  in  the  early 
part  of  last  year  about  the  time  the  Commission  had  finished 
its  inventory  and  tentative  appraisal  of  the  physical  property 
of  the  Company.  Since  that  time  the  Company's  engineers  have 
been  engaged  in  checking  the  Commission's  appraisal  and  in 
preparing  a  presentation  of  their  case  based  upon  an  entirely 
different  theory  from  that  of  a  Continuous  Property. 

TPIEORY  OF  COST  OF  REPRODUCTION  NEW. 

As  presented  by  the  Company,  the  theory  of  the  Cost  of  Re- 
production New  means  that  the  value  upon  which  it  should  be 
permitted  to  earn  a  fair  return  should  be  the  estimated  cost  of 
reproducing  at  the  present  time,  the  property  as  it  now  exists. 

At  first  sight  this  may  appear  reasonable,  provided  the  esti- 
mates are  reasonable.  In  fact  the  theory  is  probably  as  good  as 
many  of  the  various  theories  advanced  for  arriving  at  an  esti- 
mate of  Earning  Value,  but  there  are  so  many  and  various 
elements  and  conditions  to  be  considered  in  the  valuation  of  a 
large  public  service  property  that  a  strict  adherence  to  any  set 
theory  is  likely  to  produce  results  which  are  manifestly  un- 
reasonable and  unjust. 


I 


i 


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Report. 


21 


Table  VII.  sets  forth  the  Company's  estimate  of  the  Earning 
Value  of  its  property  according  to  the  theory  of  Cost  of  Repro- 
duction New.  Some  of  the  items  entering  into  this  Table  are 
based  upon  costs  as  produced  under  conditions  existing  in  the 
actual  construction  of  the  present  property,  while  other  items 
are  based  upon  purely  hypothetical  conditions  of  reproduction. 

The  theory  of  this  presentation  of  Earning  Value  is  rejected 
by  the  Commission  on  the  ground  that  it  disregards  the  actual 
conditions  under  which  the  property  was  produced,  and  sets  up 
a  purely  hypothetical  case  which  is  not  analogous  to  the  one 
under  consideration. 

As  to  the  amounts  of  the  items  appearing  in  Table  VII., 
some  of  them  appear  reasonable  and  correspond  closely  to  the 
figures  obtained  by  the  Commission.  Others  appear  unreason- 
able in  amount  and  vary  greatly  from  the  corresponding  fig- 
ures of  the  Commission. 

Irrespective  of  the  amounts  assigned  to  them,  the  elements 
of  value  as  enumerated  in  Table  VII  correspond  in  the  main  to 
the  elements  which  in  the  opinion  of  the  Commission  should 
enter  into  the  valuation  of  the  property,  but  there  are  among 
them  several  elements  carrying  large  assignments  of  value  which 
do  not  appear  to  the  Commission  to  be  properly  allowable. 

All  the  elements  and  figures  entering  into  Table  VII  will  be 
taken  up  and  treated  in  detail  later  in  the  report,  where  they 
can  be  compared  with  the  corresponding  items  as  allowed  by 
the  Commission.  Before  doing  this,  however,  it  becomes  neces- 
sary to  set  forth  the  methods  by  which  the  Commission  has 
made  its  valuation  of  the  Company's  physical  property,  and 
also  to  show  in  some  detail  the  complete  results  of  this  valua- 
tion work. 


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24 


Eeport. 


THE   COMMISSION'S   METHODS   OF   APPRAISAL   OF 

THE  PHYSICAL  PROPERTY. 

In  establishing  a  correct  Earning  Value  for  a  public  service 
property,  the  most  important  element  is  the  construction  cost  of 
the  physical  or  tangible  property,  for  not  only  is  this  element 
generally  the  largest  item  of  value,  but  upon  it  are  based  many 
of  the  other  elements  deduced  by  the  use  of  percentages.  The 
construction  cost  in  the  Company's  presentation  is  represented 
by  item  3  under  Class  II  in  Table  VII. 

In  arriving  at  these  results,  the  Company's  engineers  have 
worked  largely  from  the  books,  but  for  the  reason  set  forth  on 
page  10,  i.  e.,  in  order  to  check  the  books  with  the  present  ex- 
isting property,  the  Commission  was  obliged  to  make  a  com- 
plete and  detailed  inventory  and  appraisal  of  the  property. 

Slip-shod  methods  or  so-called  ''horseback  valuations,"  which 
are  at  best  mere  opinions  of  the  engineers  in  charge,  cannot  be 
used  in  public  service  work,  and  no  efficient  Public  Service  Com- 
mission in  the  country  will  now  accept  such  valuations  as 
worthy  of  consideration. 

It  is  necessary  that  the  valuation  work  of  a  Public  Service 
Commission  shall  be  based  as  far  as  possible,  on  facts,  not 
opinions,  and  shall  show  and  record  these  facts  in  such  a  man- 
ner that  they  shall  be  as  clearly  convincing  and  complete  as  it 
is  possible  to  make  them. 

The  doing  of  thorough  work  requires  time  on  the  part  of  a 
Commission,  and  fair  play  demands  that  ample  time  be  given  to 
the  Company  for  presenting  its  side  of  the  case.  This  Com- 
mission has  taken  the  time  to  do  its  work  thoroughly,  and  has 
allowed  the  Company  generous  opportunity  for  presenting  its 
case,  although  the  members  of  the  Commission  have  been 
somewhat  concerned  from  time  to  time  by  apparent  misunder- 
standings on  the  part  of  the  public  as  to  the  character  of  effi- 
cient public  service  work  and  the  time  required  to  do  it.  It 
should  be  remembered  in  this  connection  that  the  Commission 
has  not  only  finished  the  investigation  of  the  Union  Electric 
Light  and  Power  Company,  but  has  very  nearly  completed  its 
inventory  and  tentative  appraisal  of  the  vast  property  of  the 
United  Railways  Company. 


Report. 


25 


:  1 1 


^ 


Making  Inventory. 

In  making  the  inventory  for  the  appraisal  of  the  Union 
Electric  Light  and  Power  Company's  property,  the  representa- 
tives of  the  Commission  have,  whenever  possible,  personally 
inspected  and  listed  in  detail  cach  item  of  property,  and  have 
made  for  record  such  maps  and  diagrams  as  will  enable  all 
the  different  items  to  be  readily  located  in  the  plants  or  on  the 
distribution  system. 

A  record  of  the  buildings  of  the  Company  has  been  made 
from  actual  measurements,  and  from  reliable  plans  and  data, 
giving  for  each  building  the  quantity  and  kind  of  excavation, 
the  quantity  and  kind  of  concrete  work,  the  quantity  and  kind 
of  stone  and  brick  work,  the  tonnage  and  construction  of  steel, 
the  quantity  and  kind  of  roofing,  and  all  other  data  necessary 
for  making  up  complete  quantity  specifications  for  the  buildings 
as  they  existed  at  the  time  of  inventory.  The  equipment  of 
each  generating  plant  and  sub-station  has  been  carefully  in- 
spected and  listed,  and  where  necessary,  accurate  plats  and 
diagrams  have  been  made  for  the  future  identification  and  loca- 
tion of  the  different  items. 


i) 


f 


Overhead. 

In  making  its  inventory  of  the  overhead  system,  the  Com- 
mission had  working  maps  prepared  from  the  records  of  the 
Company,  showing  the  location  of  each  individual  pole,  and  giv- 
ing the  size  and  length  of  each  run  of  wire.  These  maps  were 
then  given  to  the  inspectors  of  the  Commission,  who  made  a 
thorough  check  and  field  inspection,  reporting  the  lengths  and 
size  of  poles,  the  number  of  cross-arms  and  guy  wires,  the  con- 
dition of  poles,  whether  set  in  earth  or  concrete,  the  runs 
of  wires,  the  location,  type  and  size  of  pole  transformers,  and 
all  other  data  necessary  to  an  accurate  valuation.  Where  the 
property  did  not  check  with  the  lists  or  maps,  note  of  discrep- 
ancy was  made  for  use  in  the  valuation. 


r 


< 


i 


26 


Report. 


Underground, 

In  making  the  inventory  of  the  underground  system  of  con- 
duits and  caoles,  the  Commission  had  to  deal  with  a  system  of 
conduits  which  were  installed  under  a  joint  agreement  between 
a  number  of  different  lighting  and  power  companies  which  ex- 
isted before  most  of  them  were  consolidated  into  what  is  now 
the  Union  Electric  Light  &  Power  Co.  This  system  known  aa 
the  joint  conduit,  is  now  owned  by  the  Union  Electric  Light  & 
Power  Company,  and  the  Phoenix,  Light,  Heat  &  Power  Com- 
pany, in  proportion  to  the  duct  feet  paid  for  by  each.  The 
Phoenix  Company  is  owned  by  the  Laclede  Gaslight  Company. 
There  is  also  one  duct  in  each  run  of  conduit  set  aside  for  the 
use  of  the  city.  This  city  duct  by  the  terms  of  the  ordinance, 
was  paid  for  by  the  joint  owners  of  the  system  in  proportion  to 
their  several  ownerships  of  duct  feet. 

In  making  the  inventory  of  the  joint  system  it  was  neces- 
sary to  separate  the  proportional  ownerships  as  between  the 
Union  and  the  Phoenix  Companies,  and  also  to  assign  the  costs 
of  the  city  ducts  in  proper  proportion  to  each  of  the  present 
joint  owners. 

In  addition  to  the  joint  conduit  system,  there  are  the  con- 
duits owned  wholly  by  the  Union  Electric  Light  &  Power  Co., 
and  a  system  owned  by  the  National  Subway  Company,  a  cor- 
poration, the  stock  of  which  appears  to  be  owned  equally  by 
the  Union  Electric  Light  and  Power  Company  and  the  Laclede 
Gaslight  Company.  Each  of  these  systems  has  been  separately 
inventoried  and  recorded  by  proper  maps  and  sections,  showing 
locations  in  the  streets,  and  sizes  and  location  of  manholes  and 
service  boxes,  and  each  system  has  been  properly  inspected  and 
checked  by  representatives  of  the  Commission. 

The  cables  contained  in  these  conduits  had  also  to  be  map- 
ped, inventoried  and  inspected;  this  last  work  in  itself,  being 
no  small  task. 


I 


r 


J,  \i 


Report. 


27 


i 


^ 


f 


\ 


\ 


Assignment  of  Cost. 

Having  made  a  complete  detailed  inventory  of  the  entire 
physical  property  of  the  Company,  the  engineers  of  the  Com- 
mission assigned  to  each  item,  as  nearly  as  possible,  its  origi- 
nal cost  in  place  and  ready  for  service.  These  costs  were  when 
possible,  taken  from  actual  signed  contracts  in  the  files  of  the 
Company,  and  where  such  contracts  did  not  exist,  cost  esti- 
mates were  made  from  data  for  similar  work,  collected  by  the 
engineering  staff  of  the  Commission.  Copies  of  all  contracts 
used  for  cost  data  were  made  for  the  records  of  the  city  and  an 
extensive  collection  of  other  cost  data  was  properly  filed  and  in- 
dexed for  future  reference,  giving  the  city  one  of  the  most  ex- 
tensive and  reliable  collections  of  cost  data  on  this  subject,  in  the 
country. 

After  the  Commission  had  arrived  at  a  tentative  valuation  of 
the  physical  property,  the  Company  asked  for,  and  were  given, 
the  opportunity  of  going  over  the  work  in  complete  detail. 
Nearly  a  year  has  been  consumed  by  the  Company  in  doing  this 
work,  and  only  a  few  days  ago  it  presented  its  final  figures  to 
the  Commission. 

In  the  item  of  construction  costs  or  cost  of  physical  property, 
it  appears  that  the  Company's  estimate  does  not  show  any  great- 
er difference  in  results,  from  that  of  the  Commission,  than 
could  be  expected  from  two  appraisals,  both  honestly  made,  but 
of  course  from  slightly  different  points  of  view.  In  fact  the  en- 
tire difference  in  estimated  cost  of  the  present  existing  physical 
property  is  not  great  enough  to  materially  affect  any  rates 
which  might  be  based  upon  either  one  of  them. 

The  possibility  of  reaching  such  comparatively  satisfactory 
results  in  the  construction  cost  item,  is  due  very  greatly  to  the 
detail  methods  adopted  by  the  Commission. 

As  every  item  in  the  whole  inventory  was  clearly  located 
and  identified  on  the  maps,  diagrams  and  lists  of  the  Commis- 
sion, it  was  in  position  to  know  definitely  whether  any  material 
pointed  out  by  the  Company's  engineers  as  omitted,  had  really 
been  omitted,  and  upon  any  such  claims  arising,  the  Commis- 
sion had  simply  to  require  that  the  item  claimed  be  shown  to 


28 


Report. 


its  representatives.     When  shown,  it  could  make  the  allow- 
ance; when  not  shown  it  could  refuse  it. 

In  short,  with  material  all  accurately  located,  the  quantities 
become  largely  a  matter  of  plain  fact,  and  there  should  be  no 
serious  disagreement  in  regard  to  them. 

With  prices  of  material  also,  there  is  little  chance  of  wide 
disagreement,  as  they  can  be  quite  definitely  arrived  at  from 
the  vouchers  of  the  Company  or  from  comparative  cost  data 
on  record  in  the  Commission's  office. 

The  most  difficult  point  of  agreement  is  in  certain  items  of 
labor,  which  are  more  or  less  matters  of  estimate  upon  which 
there  may  be  very  wide  differences  of  honest  opinion.  In  fact 
the  greater  share  in  the  difference  of  estimated  cost  of  con- 
struction seems  to  be  in  labor  items. 

In  speaking  here  of  the  approximation  of  the  figures  of  the 
Company's  engineers  and  the  engineers  of  the  Commission,  it 
should  be  remembered  that  we  are  speaking  only  of  the  figures 
representing  the  construction  cost  of  the  present  existing  physi- 
cal property  of  Company  or  the  construction  costs. 

These  values  all  deal  with  physical  facts,  and  it  is  to  be  ex- 
pected that  a  close  agreement  would  be  possible  between  fair 
minded  men. 

As  a  result  of  this  work  the  city  has  obtained  a  complete 
record  of  the  location  and  value  of  the  physical  property  of  the 
Company  as  it  now  exists,  and  by  a  proper  system  of  reports  to- 
gether with  inspection  from  time  to  time,  it  should  be  possible 
to  maintain  a  correct  record  of  the  value  of  the  plant  for  many 
years  to  come. 

Extent  of  the  Property. 

The  plant  of  the  Union  Electric  Light  and  Power  Company 
includes  three  large  generating  stations  with  full  equipment, 
seven  substations  and  the  equipment  of  each,  and  a  number  of 
other  buildings  used  for  store  houses,  stables,  etc. 

In  the  overhead  system  of  distribution  there  are  approximate- 
ly 13,000  poles  with  24,000  cross-arms  on  them,  besides  some 
32,000  cross-arms  owned  by  the  Company  but  located  on  foreign 
poles. 


^ 


< 


f 


Report. 


29 


The  wire  in  the  overhead  equipment  amounts  to  approxi- 
mately 3800  miles. 

In  the  underground  distribution  equipment,  there  are  some 
350  miles  of  cable  of  different  sizes,  and  approximately  700 
miles  of  ducts  of  different  types.  Added  to  all  these  are  in- 
numerable smaller  items  to  be  valued,  such  as  the  service  con- 
nections from  the  mains  to  the  houses,  the  transformers  and 
meters  scattered  throughout  the  city,  teams,  wagons,  automo- 
biles, office  furniture  and  contents  of  store  rooms. 


THE  COMMISSION'S  VALUATION. 

The  aim  of  the  Commission  in  determining  the  Earning 
Value  of  the  property  of  the  Union  Electric  Light  and  Power 
Company,  has  been  to  arrive  at  a  fair  and  reasonable  present 
value  of  the  property  in  the  service  of  the  public  at  the  date 
of  this  investigation. 

The  theory  or  rather  method  by  which  the  Commission  has 
arrived  at  its  final  figures  differs  essentially  from  the  theory  of 
Cost  of  Reproduction  New,  as  used  by  the  Company,  in  that  the 
Commission  has  taken  into  consideration  the  actual  conditions 
under  which  the  property  has  been  created,  while  the  Company, 
as  stated  before,  has  assumed  a  hypothetical  set  of  conditions. 
The  Commission  believes  its  own  method  to  be  much  the  bet- 
ter one  for  arriving  at  results  calculated  to  do  justice  to  all 
parties  concerned.  In  the  major  item  of  value,  viz:  the  con- 
struction cost,  there  can  be  no  dispute  as  to  method,  as  a  great 
part  of  the  property  has  been  recently  completed,  and  in  the 
older  parts,  through  lack  of  reliable  data  for  old  costs,  the  Com- 
mission's engineers  have  been  compelled  to  a  great  extent,  to 
use  present  prices.  In  fact  it  has  been  agreed  between  the 
Commission  and  the  Company  that  the  cost  prices  used  are  ap- 
plicable to  either  theory. 

In  assigning  costs  or  values  to  elements  other  than  con- 
struction or  those  dependent  directly  on  construction,  the  Com- 
mission has  endeavored  to  arrive  at  figures  which  will  repre- 
sent fairly  what  those  costs  should  have  been  under  all  the 
existing  conditions. 


J 


I 


30 


Report. 


The  Commission  believes  that  it  can  safely  be  assumed  that 
in  every  transaction  leading  to  the  assignment  of  Earning 
Value  to  a  public  utility,  there  is  a  third  party  in  interest, 
namely,  the  public,  and  that  while  the  rights  of  the  public  may 
have  been  neglected  in  many  cases  in  the  past,  it  by  no  means 
follows  that  they  have  been  destroyed,  and  it  becomes  the  plain 
duty  of  officials  charged  with  recommending  just  rates  for 
public  service,  to  prevent  so  far  as  possible,  the  injustice  of  bas- 
ing these  rates  upon  values  established  by  transactions  in  which 
the  rights  of  the  public  have  not  been  considered. 

The  Commission  does  not  assume  that  the  regulating  of- 
ficials can  usurp  the  functions  of  a  board  of  directors  in  de- 
termining the  transactions  of  a  public  service  corporation. 
These  acts  will  stand  so  far  as  they  affect  the  interests  of  the 
property  alone,  but  in  so  far  as  they  affect  the  interests  of  the 
public  they  must  be  carefully  considered  in  assigning  values 
upon  which  the  public  is  called  upon  to  pay  a  return. 

If  the  public  has  no  power  to  review  the  expenditures  of 
public  service  corporations,  especially  where  the  purchase  of  or 
consolidation  with  other  Companies  is  concerned,  and  if  prices 
paid  either  in  stock,  bonds  or  cash  in  these  transactions  must  be 
taken  at  their  face,  then  the  Earning  Value  can  be  made  any- 
thing the  owners  of  the  property  desire,  and  public  control  or 
regulation  becomes  futile.  Hence,  while  the  Commission  has 
given  full  consideration  to  many  of  the  extraordinary  difficul- 
ties involved  in  creating  the  property  under  consideration,  and 
has  made  due  allowance  for  such  difficulties,  it  believes  that  the 
public  should  have  the  benefit  of  whatever  advantages  there  were 
in  the  conditions,  and  that  the  actual  costs  should  not  be  a  guide 
where  it  is  evident  that  the  interests  of  the  public  have  been 
ignored  in  the  financiering  of  the  Company. 


ft 


1 


^ 


f 


Report. 


31 


TABLE  VIII. 

ESTIMATED  COST  OF  PRESENT  PROPERTY. 

I.     Organization — 

1.  Expense    of    Organization 

2.  Interest   on  Organization   Expense 

II.     Construction — 

1.  Cost  of  Real  Estate 

2.  Cost  of  Construction . . . 

3.  Cost  of  Engineering 

4.  Interest  on  Construction  Expenditure 

5.  Taxes  and  Insurance  during  Construction.... 

III.  Working  Capital 

IV.  Kinloch   Pole  Contract 

V.     Allowance  for  Cost  of  Establishing  Business 

Total    Estimated    Cost 


$      125,500 
32.944 


414,240 
12,586,741 
629,337 
725,780 
130,203 

865,520 

80,000 

1,000,000 

$16,590,265 


Table  VIII  sets  forth  the  estimated  cost  of  the  property  now 
in  the  service  of  the  public,  as  determined  by  the  Commission, 
before  deduction  is  made  for  depreciation  for  present  condition, 
and  before  addition  is  made  for  present  value  of  real  estate. 
Both  of  these  items  will  be  treated  of  later  in  the  report. 

The  elements  of  value  are  arranged  in  the  report  under 
headings  which  refer  to  the  item  numbers  in  Table  VIII,  and 
to  the  item  numbers  of  the  comparable  items  in  Table  VII. 

Organization. 
Item  I.,  Table  VIII. 

Item  /.,  Table  VII. 

In  addition  to  the  value  of  its  physical  property,  the  Com- 
pany is  entitled  to  have  recognized  as  part  of  its  assets  on  which 
it  is  entitled  to  earn  a  return,  such  amounts  of  money  as  have 
been  expended  by  way  of  fees  paid  to  the  state,  legal  expenses, 
etc.,  in  the  formation  of  the  corporation  and  the  legitimate 
expenses  of  obtaining  thfe  franchise  by  the  corporation,  if  any; 
but  expenses  preliminary  to  the  organization  of  the  corpora- 


I 


, 


32 


Report. 


tion  in  prospecting  the  field,  interesting  prospective  stockhold- 
ers, and  promoters'  profits  are  not,  in  the  opinion  of  the  Com- 
mission, under  the  laws  of  this  State,  proper  items  for  con- 
sideration in  this  connection. 

The  Company  claims  for  this,  $709,000  and  presented  expert 
testimony  in  support  of  its  claim,  based  on  the  theory  of  cost 
of  reproduction  new  of  the  Company,  but  its  witnesses  included 
in  this  item  many  elements  of  expense  which  do  not  seem  ap- 
plicable to  this  case,  or  indeed  proper  elements  of  charge  as 
part  of  this  item.  The  amount  of  the  Company's  claim  is  fixed 
arbitrarily  at  three  and  one-half  per  cent,  of  its  valuation  of  all 
the  balance  of  its  permanent  investment.  We  fail  to  see  any  re- 
lation between  this  item  of  expense  and  the  value  of  the  Com- 
pany's investment,  and  no  reason  was  given  for  thus  determin- 
ing its  amount. 

It  appears  to  be  simply  an  arbitrary  method  of  arriving  at 
the  amount  of  this  expense.  We  consider  that  an  allowance  of 
$125,500  is  ample  to  cover  this  item.  Interest  is  allowed 
specifically  upon  this  item,  inasmuch  as  such  expenditures  gen- 
erally precede  the  operation  of  the  plant  by  a  considerable 
period  of  time. 

Time  and  Expense  of  Permanent  Organization  Force 

During  Construction. 

Item  1-77.,  Table  VII. 

By  this  item  the  Company  is  understood  to  mean  the  time 
and  attention  given  to  construction  by  the  officials  of  the 
Company  during  a  period  of  construction  before  the  plant 
comes  into  operation. 

There  Avould  probably  be  some  reason  for  allowing  this  ele- 
ment of  cost,  where,  as  under  the  assumed  conditions  of  the  the- 
ory of  Cost  of  Reproduction  New,  the  circumstances  would 
compel  the  employment  of  certain  clerks  and  officials  some 
time  before  there  were  any  duties  to  perform  in  connection 
with  actual  operation.  However,  the  actual  conditions  in  the 
case  under  consideration  were  somewhat  different  from  these 
assumed  conditions. 

The  Union  Electric  Light  and  Power  Company  No.  2  bought 
or  acquired  an  estabHshed  business  at  its  beginning,  and  in  so 


\ 


1 


% 


r 


f 


it;- 


I 


^ 


Report. 


33 


far  as  its  officials  and  members  of  the  permanent  organization 
were  employed  for  the  purpose  of  operation  alone,  their  duties 
in  the  construction  of  extensions  however  large,  should  have 
been  merely  incidental,  provided  that  a  separate  and  competent 
engineering  force  were  employed. 

As  a  matter  of  fact,  as  is  often  the  case,  the  operating  of- 
ficials and  the  engineering  officials,  were  to  a  great  extent  iden- 
tical, and  in  making  an  allowance  of  5  per  cent,  for  engineering 
on  all  the  items  of  construction,  the  Commission  considers  that 
it  has  made  allowance  to  cover  the  cost  of  the  time  of  officials 
paid  for  as  operating  expenses  but  really  devoted  to  engineering. 
Item  No.  l-II,  Table  VII,  is  therefore  not  allowed,  as  under 
the  actual  conditions  of  the  construction  it  is  paid  for  by  item 
3-II,  Table  VIII. 

Valuation  of  Land. 

Item  1-77.,  Table  VIII. 

Item  2-1 1. ,  Table  VII. 
In  determining  the  value  of  the  land  owned  and  used  by  the 
Company  and  on  which  it  is  entitled  to  a  fair  return,  it  seems 
necessary,  in  order  to  be  consistent,  to  follow  the  same  rule  as 
in  the  case  of  the  other  property  of  the  Company,  that  is,  to 
take  its  present  value.  And  although  this  value  may  be  more 
than  the  original  cost  of  the  land,  yet,  inasmuch  as  the  land  is 
used  in  serving  the  public,  and  if  not  so  used  could  be  realized 
upon  by  the  Company  at  its  present  value,  it  seems  only  fair 
that  this  present  value  should  be  the  basis  for  estimating  the 
amount  of  return  which  the  Company  is  entitled  to  earn.  If  the 
real  estate  should  have  depreciated  in  value  since  its  purchase 
by  the  Company,  it  follows  that  a  return  upon  such  depreciated 
value  only  would  be  allowed,  as  is  done  in  the  case  of  the  other 
physical  property  of  the  Company.  This  appreciated  value  is  in 
the  nature  of  a  profit  re-invested  for  the  use  of  the  public.  This 
rule  was  approved  by  the  United  States  Supreme  Court  in  the 
case  of  Willcox  vs.  Consolidated  Gas  Co.,  212  U.  S.,  19.  But 
the  Court  in  that  case  also  says  this : 

"We  do  not  say  that  there  may  not  possibly  be  an  ex- 
ception to  it,  where  the  property  may  have  increased  sc 
enormously  in  value  as  to  render  a  rate  permitting  a  reason- 
able return  upon  such  increased  value  unjust  to  the  pub- 
lic." 


I 


34 


Report. 


Report. 


35 


The  land  owned  by  this  Company  consists  of  eleven  parcels, 
all  of  which  with  the  exception  of  the  lot  on  Gratiot  Street  be- 
tween Third  and  Fourth  Streets,  which  is  of  small  value,  are  in 
present  actual  use  by  the  Company.  Several  of  these  tracts 
are  the  sites  of  power  plants  of  former  Electric  Light  Concerns 
and  acquired  ultimately  by  the  present  Company.  Two  of 
these  power  houses,  those  of  the  Missouri  Electric  Co.,  at  Twen- 
tieth and  Locust.  Streets,  and  of  the  Municipal  Electric  Light 
and  Power  Co.,  at  Eighteenth  and  Gratiot  Streets,  have  been 
dismantled  and  are  now  used  as  storehouses,  stables  and  garage. 

In  fixing  the  value  on  the  land  the  Commission  considered 
such  value  independent  of  the  improvements,  the  latter  being 
valued  as  a  separate  item  in  each  instance.  All  of  the  land  be- 
longing to  the  Company  is  held  in  fee,  except  three  pieces, 
namely,  the  two  lots  at  Tenth  and  St.  Charles  Streets,  and  the 
lot  on  St.  Charles  near  Seventh  Street. 

And  in  the  case  of  these  three  the  Company  holds  ninety-nine 
year  leases  in  which  the  expired  portions  of  the  terms  are  so 
short  as  not  to  affect  their  value. 

The  Company  had  all  of  its  real  estate  appraised  by  two 
recognized  experts  in  real  estate  values  in  this  city  and  pre- 
sented to  the  Commission  the  written  statements  of  these  ex- 
perts, and  at  the  suggestion  of  the  Commission  these  gentle- 
men appeared  before  the  Commission  in  support  of  their  writ- 
ten statement.  The  Commission  had  this  property  appraised 
by  two  equally  prominent  and  reliable  experts  in  real  estate 
values,  and  the  figures  of  these  two  sets  of  experts  are  pre- 
sented in  the  accompanying  table. 


^ 


>^ 


Real  Estate  Table. 


Value  Fixed  by 
Description  of  Companies' 

Real  Estate.  Appraisers. 

1.  Lot  in  City  Block  227,  fronting  448' 

on  Lewis  St.,  226'  on  Biddle  St., 
312'  on  Ashley  St.  and  540'  on  Mis- 
sissippi  River $2,657,720.00 

2.  Lot  in  City  Block  226,  fronting  240' 

on  Lewis  St.  between  Ashley  and 

O'Fallon  Sts 240,000.00 

3.  Lot  in  City  Block  900,  fronting  269' 

on  Locust  St.  by  155'  on  Twentieth 

Street 190,000.00 

4.  Lot   in   City   Block   95,   fronting   28' 

7%"  on  Fourth  St.  by  135'  in  depth, 

between  Morgan  St.  and  Lucas  Ave.       14,000.00 

5.  Lot  in  City  Block  84,  fronting  33'  7" 

on  Fourth  St.  by  a  depth  of  152'  8", 

between  Walnut  and  Market  Sts..        17,000.00 

6.  Lot  in  City  Block  3753,  Morgan  St., 

145'    west    of    Vandeventer,     95'x 

155'%" 9,500.00 

7.  Lot  in  City  Block  50,  Gratiot  St.  be-  • 

tween  Second  and  Third  Sts.,  48'2''x 

128'5i^" 5,000.00 

8.  Lot  in  City  Blocks  456  and  2286,  Gra- 

tiot St.,  210'  west  of  Eighteenth  St., 

280'x210' 170,000.00 

9.  Lot  in   City  Block  272,   St.   Charles 

36'4"  west  of  Ninth  St.,  91'8y2"x 
96'x9^",  ninety-six  year  lease,  dat- 
ed May  31,  1900.  Annual  rental, 
$3,750.    Value  of  leasehold 33,500 .  00 

10.  Lot  in  City  Block  272,  southeast  cor- 

ner Tenth  and  St.  Charles  Sts., 
142'6"x85',  ninety-nine  year  lease, 
dated  June  8,  1897.  Annual  rental, 
$5,500.     Value  of  leasehold 102,500.00 

11.  Lot  in  City  Block  164,   St.   Charles 

St.,  103'2yo"  west  of  Seventh  St., 
41'4"x69'4",  ninety-nine  year  lease, 
dated  March  1,  1906.  Average  an- 
nual rental,  $2,500.  Value  of  lease- 
hold        10,000.00 


Value  Fixed 
Commissions' 
Appraisers. 


$    375,000.00 


45,000.00 


112,000.00 


19,600.00 


16,500.00 


6,175.00 


4,800.00 


55,000.00 


10,000.00 


45,000.00 


5.000.00 


Total $3,449,220.00        $    694,075.00 


36 


Eeport. 


The  lots  in  city  blocks  227  and  226,  the  first  on  Lewis  between 
Ashley  and  Biddle  Streets,  and  on  which  is  situated  the  main 
generating  plant  of  the  Company  referred  to  herein  as  the 
Ashley  Street  plant,  and  the  second  on  Lewis  Street  between 
Ashley  and  O'Fallon  Streets,  on  which  is  located  the  plant 
acquired  from  the  Laclede  Power  Co.  in  1907,  referred  to  as  the 
Lewis  Street  plant,  are  of  such  character  as  to  make  it  very  dif- 
ficult to  fix  their  value  with  definiteness.  The  former  fronts 
directly  on  the  Mississippi  River  giving  it  the  advantage  of  a 
water  front,  valuable  not  only  by  reason  of  opportunity  for  re- 
ceiving coal  and  other  supplies  by  river,  but  also  because  it  en- 
ables the  Company  to  obtain  an  unlimited  supply  of  water 
directly  from  the  river  without  other  cost  than  that  of  pumping, 
and  thus  avoiding  the  payment  of  water  rates  to  the  city.  The 
other  lot,  while  being  separated  from  the  river  by  the  wharf, 
has  also  the  privilege  of  obtaining  water  directly  from  the 
river.  These  two  lots  have  then  this  special  value  in  addition 
to  the  value  common  to  other  property  in  the  vicinity  not  hav- 
ing these  special  advantages.  As  evidence  of  the  difficulty  of  de- 
termining the  value  of  these  two  properties  is  the  wide  dis- 
parity in  the  value  placed  on  them  by  the  experts  of  the  Com- 
pany and  by  the  experts  of  the  Commission.  As  to  the  other 
parcels  of  land,. while  in  some  cases  there  is  considerable  dif- 
ference in  the  estimates  of  the  two  sets  of  experts,  such  differ- 
ences are  not  nearly  so  great  proportionately  as  in  these  two 
instances. 

In  partial  explanation  of  this  wide  difference  of  opinion  in  the 
case  of  the  Ashley  Street  lot  especially,  it  may  be  said,  that  the 
opinion  of  the  experts  of  the  Company  was  avowedly  based  on 
the  value  of  this  land  for  the  special  uses  of  this  company,  con- 
sidering the  enormous  quantity  of  w^ater  used  by  it  for  con- 
densing purposes  and  which  it  is  enabled  to  draw  directly  from 
the  river,  being  far  in  excess  of  the  amount  which  it  would 
use  were  the  supply  not  unlimited  and  free,  and  the  further  con- 
sideration by  the  experts,  of  prices  which  it  is  claimed  have 
been  paid  for  land  in  this  vicinity  for  use  for  freight  houses 
and  switch  tracks.  But  in  the  opinion  of  the  Commission 
neither  of  these  considerations  should  control  the  determina- 
tion of  the  value  of  the  land.  The  value  of  a  tract  of  land  is, 
generally  speaking,  what  it  is  worth  in  the  market,  what  it  can 


4 


] 


4 


r 


Report. 


37 


be  sold  for,  and  the  special  value  which  it  may  have  to  any  one 
person  or  corporation  cannot  be  taken  as  determining  its  actual 
value,  nor  can  the  prices  paid  by  railroads  for  land  be  taken  as 
a  fair  criterion  of  the  value  of  land  in  the  vicinity,  for  it  is  gen- 
erally recognized  that  such  corporations  frequently  pay  many 
times  more  than  the  real  value  of  land  rather  than  suffer  the 
uncertainties  and  delays  incident  to  condemnation  proceed- 
ings. This  value  created  by  a  demand  on  the  part  of  the  rail- 
road is  really  only  temporary,  enduring  only  so  long  as  the 
railroad  is  in  the  market  for  land  in  that  vicinity,  and  this 
temporarily  added  value,  which  is  in  a  sense  fictitious,  disap- 
pears as  suddenly  as  it  appears  as  soon  as  the  needs  of  the  rail- 
road in  the  vicinity  have  been  satisfied,  saving  of  course  such 
added  value  as  the  land  may  retain  by  reason  of  its  location 
in  the  immediate  vicinity  of  the  railroad.  In  view  of  the  rea- 
sons on  which  the  experts  of  the  Company  based  their  esti- 
mate of  the  value  of  these  two  tracts  of  land,  the  Commission 
is  of  the  opinion  that  these  estimates  so  based  cannot  be  safely 
used  in  determining  such  value.  And  the  Commission  has 
therefore  in  this  instance  relied  more  on  the  opinion  of  the 
real  estate  experts  engaged  by  it,  whose  opinions  are  based  on 
the  views  as  herein  expressed  as  to  what  constitutes  the  proper 
basis  for  determining  real  estate  values.  The  Commission  feels 
fortified  in  its  conclusion  in  this  case  by  the  fact  that  this  Ashley 
Street  lot  was  purchased  in  1901  by  the  Citizens  Electric  Light 
and  Power  Co.,  one  of  the  predecessor  Companies  of  the  pres- 
ent Company,  for  $100,000,  cash,  and  $147,000  in  stock  of  the 
Citizens  Electric  Light  Co.,  which  stock  was  at  the  time  of  verv 
uncertain  value,  and  the  further  fact  that  this  lot  is  at  present 
assessed  for  taxation  purposes  at  $62,500. 

The  value  of  the  Ashley  Street  lot  is  placed  by  the  Com- 
pany's experts  at  $20  per  square  foot,  or  almost  $6,000  per 
front  foot,  and  by  the  Commission's  experts  at  approximate v 
$2.80  per  square  foot,  or  approximately  $850  per  front  foot.  If 
this  lot  is  as  valuable  as  estimated  by  the  Company's  experts, 
it  would  then  be  a  serious  question  whether,  as  is  suggested  by 
the  Supreme  Court  of  the  United  States  in  the  decision  above 
referred  to,  it  would  not  be  unjust  to  the  public  to  permit  a 
reasonable  return  upon  such  enormous  increase  in  value.  In 
the  opinion  of  the  Commission  a  fair  value  for  the  Ashley 


38 


Report. 


Street  lot  is  $3.00  per  square  foot  or  in  round  numbers  $400,000. 
We  are  of  the  opinion  that  the  Lewis  Street  lot  is  worth  $70,000, 
the  Locust  Street  lot  $122,000,  the  Eighteenth  and  Gratiot 
Street  lot  $100,000,  and  as  to  the  other  lots  we  consider  the 
values  of  the  Commission's  experts  fair,  and  we  adopt  them  as 
such.  This  gives  an  aggregate  value  to  the  real  estate  in  our 
opinion,  of  an  amount  approximating  so  nearly  to  $800,000, 
that  we  fix  that  figure  as  the  total  value  of  the  real  estate. 

Cost  of  Construction. 

Item  2-IL,  Table  VIIL 
Item  S-IL,  Table  VIL 

TABLE  IX. 

SUMMARY  OF  ESTIMATE  OF  CONSTRUCTION  COST. 


P.  S.  C. 

Estimated 

Cost. 

Company's 

Estimated 

Cost. 

Difference. 

1    Ashlev  St    Plant 

$   5,131.378.71 

654,309.38 

677,854.97 

202,959.63 

209,020.90 

290.555.68 

230,016.41 

28,832.75 

1,413,368.97 

2,870,150.18 

878,293.80 

%  5,315,667.00 

683,074.00 

704,597.00 

211,884.00 

217,680.00 

382,002.00 

243,143.00 

41,538.00 

1,545,205.41 

3,013,789.61 

932,066.00 

3.59% 

2    Tjpwis  St    Plant 

4.39% 

3.  Substation  No.  3  &  10th  St... 
4    Substation  No.  1 

3.95% 
4.39% 

fi     Snh«?tntion    No     2       

4.14% 

6.  Sta.  A  &  B,  Substation  No.  4 

7     Substation   No     5    

31.48% 
5.76% 

S    Substation  No.  7 

44.06% 

Q     Ovprbpacl  SvstGITl 

9.33% 

10    T^ndprsrround  Svstem 

5.005% 

11.  Misc.  Physical  Properties 

6.12% 

Total        

$12,586,7j41.3_8 

$13,290,646.02*        5.51% 

1 

•Discrepancy  between  this  total  and  Company's  total.  Cost  of  Con- 
struction" as  shown  in  Table  VII,  is  due  to  a  mistake  in  addition  by 
Company,  in  summing  up  the  items  in  the  Underground  System  Table 
XIX. 

Table  IX  shows  the  summary  of  the  cost  of  the  construction 
of  the  plant,  as  estimated  by  the  Public  Service  Commission 
(figures  in  column  marked  P.  S.  C.)  and  the  Company's  engi- 
neers (figures  in  column  marked  Company)  arranged  accord- 
ing to  the  principal  divisions  of  the  physical  property.  The  per 
cent,  of  difference  between  the  two  estimates  is  shown  in  the 

last  column. 

As  stated  before,  the  Public  Service  Commission's  estimate  of 
construction  cost  was  based  upon  a  detailed  inventory,  and  the 
final  figures  arrived  at  by  a  system  of  allowances,  while  the 


i 


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Report. 


39 


Company's  engineers,  with  the  exception  of  the  overhead  and 
underground  system,  based  their  work  in  great  part  upon  a  re- 
search into  the  books  and  vouchers  of  the  Company.  In  mak- 
ing up  their  figures  from  the  books  and  vouchers,  there  could 
not  help  but  occur  many  instances  where  it  was  a  matter  of  ex- 
tremely close  judgment  as  to  whether  or  not  an  item  should  go 
into  the  cost  of  the  present  existing  property,  or  should  be 
charged  to  operation  or  depreciation.  Taking  this  feature  into 
consideration,  and  also  taking  into  consideration  those  details 
where  there  was  an  absolute  disagreement  with  the  Commission 
as  to  priced  to  be  applied,  the  results  of  the  two  appraisals  of 
the  physical  property  can  be  said  to  almost  check  one  with  the 
other. 

TABLE  X. 

ASHLEY  ST.  PLANT. 

p.  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST. 


P.  S.  C. 

Estimated 

Cost. 


Company's 

Estimated 

Cost. 


Difference, 


1.  Buildings  &  Improvements 

2.  Boilers 

3.  Steam   Piping 

4.  Auxiliary 

5.  Engines 

6.  Electrical  Machinery 

7.  Switchboards 

8.  Storage  Batteries 

9.  Station  Tools 

Total 


$2,100,105.26 
713,801.90 
280,655.49 
574,801.89 
699,717.84 
498,137.40 
232,959.30 
19,339.63 
11,860.00 


$5,131,378.71 


$5,315,667.00 


3.59% 


Table  X  shows  the  appraisal  of  the  Ashley  Street  Plant,  giv- 
ing details  as  divided  among  the  different  classes  of  equipment. 
This  and  the  following  Tables,  except  those  for  the  underground 
and  overhead  equipment,  do  not  show  comparison  in  detail 
with  the  figures  of  the  Company's  engineers  because  the  dif- 
ferent methods  used  by  the  Commission  and  the  Company  in 
dividing  the  inventory  into  sub-heads  prevents  such  a  compar- 
ison. 

The  principal  point  of  difference  between  the  Company  and 
the  Commission  in  this  appraisal  was  in  the  cost  of  piping,  the 
Company's  engineers  claiming  some  $98,000  more  for  this 
item  than  the  Commission  could  allow. 


i^ 


\'\ 


n  \ 


40 


Report. 


Report. 


41 


TABLE  XI. 

LEWIS  ST.  PLANT. 

p.  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST. 


4 


P.  s.  c. 

Estimated 
Cost. 


Company's 

Estimated 

Cost. 


Difference. 


1.  Buildings  &  Improvements 

2.  Boilers 

3.  Steam  Piping 

4.  Auxiliaries 

5.  Engines 

6.  Electrical  Machinery 

7.  Switchboards 

8.  Old  Tunnels 

Total 


$184,720.91 
75,492.70 
73,735.05 
97,766.34 
92,104.82 
95,501.24 
25,173.62 
9,814.70 


$654,309.38 


$683,074.00 


4.39% 


TABLE  XIL 

SUBSTATION  NO.  1. 

p.  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST. 


P.  S.  C. 

Estimated 

Cost. 

Company's 

Estimated 

Cost. 

Difference. 

1.  Buildings  &  Improvements... 
9    "Rlertriral  Machinerv 

$  37,229.11 
52,600.17 
29,579.28 
83,551.07 

3.  Switchboards 

4    Storaere  Batteries 

Total 

$202,959.63 

$211,884.00 

4.39% 

TABLE  XIIL 

SUBSTATION  NO.  2. 

p.  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST. 


P.  S.  C. 

Estimated 

Cost. 

Company's 

Estimated 

Cost. 

Difference. 

1,  Buildings  &  Improvements... 
2    Electrical   Machinerv 

$   45,109.02 
52,009.12 
28,446.91 
83,455.85 

3.  Switchboards 

4.  Storasre   Batteries 

Total 

$209,020.90 

$217,680.00 

4.14% 

TABLE  XIV. 

SUBSTATION  NO.  3  &  10th  ST.  P.  STATION. 

p.  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST. 


P.  S.  C. 

Estimated 

Cost. 


Company's 

Estimated 

Cost. 


Difference. 


1.  Buildings  &  Improvements. 

2.  Boilers 

3.  Steam  Piping 

4.  Auxiliaries 

5.  Engines 

6.  Electrical  Machinery 

7.  Switchboards 

8.  Storage  Batteries 

9.  Station  Tools ^. 

10.  Series  Arc  Apparatus 

Total 


;   99,559.87 

59,372.25 

45,940.81 

27,270.70 

58,248.75 

165,721.88 

100,206.43 

69,629.40 

6,773.40 

45,131.48 


$677,854.97 


$704,597.00 


3.95% 


Note. — Building    and    Steam  Piping  include  tunnels  and  pipe  lines  to 
Century  Building,  Board  of  Education  Building,  etc. 

In  Table  XI,  XII,  XIII  and  XIV,  the  difference  in  estimates 
of  a  more  or  less  general  nature  and  not  of  great  per  cent. 


TABLE  XV. 

STATION  A,  SUBSTATION  NO.  4  &  STATION  B. 

p.  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST. 


Station  A  &  Substation  No.  4. 


P.  S.  C. 

Estimated 

Cost. 


Company's 

Estimated 

Cost. 


Difference. 


1. 

2. 
3. 
4. 
5. 
6. 
7. 
8. 


9. 
10. 
11. 
12. 
13. 
14. 


Buildings  &  Improvements. 

Boilers  (Dismantled) 

Steam  Piping  (Dis.) 

Auxiliaries   (Dis.) 

Engines    (Dis.) 

Electrical  Machinery 

Switchboards 

Electrical  Machinery  (Dis.) 

Station  B. 

Buildings  &  Improvements 

Auxiliaries  (Dis.) 

Engines   (Dis.) 

Electrical  Machinery  (Dis.) 

Switchboards 

Station  Tools 

Total 


56,589.91 

4,992.00 

552.00 

71.25 

6,937.50 

42,603.75 

49,618.43 

8,681.00 


98,256.27 
3,358.15 
8,668.75 
8,668.75 
1,045.00 
512.92 


$290,555.68 


$382,002.00 


31.48% 


I 


42 


Report. 


Report. 


43 


TABLE  XVI. 

SUBSTATION  NO.  7. 

p.  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST. 


P.   S.   C. 

Estimated 

Cost. 


Company's 

Estimated 

Cost. 


Difference. 


1.  Electrical  Machinery 

2.  Switchboards 

3.  Storage  Batteries  — 

Total 


$10,152.45 

16,898.25 

1,782.05 


$28,832.75 


$41,538.00 


44.06% 


In  Tables  XV  and  XVI  there  appear  differences  in  apprais- 
al of  31.48  per  cent,  and  44.06  per  cent,  respectively,  which  are 
accounted  for  by  the  fact  that  in  these  plants  there  is  a  large 
amount  of  dismantled  and  discarded  equipment,  which  being 
no  longer  in  the  service  and  simply  awaiting  sale  as  scrap  or 
second-hand  material,  the  Commission  has  valued  it  as  such. 

The  Company's  engineers  have  carried  out  their  appraisal 
of  this  material  at  its  estimated  original  cost. 

TABLE  XVII. 

SUBSTATION  NO.  5. 

P,  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST. 


P.  S.  C. 

Estimated 

Cost. 

Company's 

Estimated 

Cost. 

Difference 

1.  Buildings  &  Improvements... 
2    Electrical  Machinery 

$   57,359.94 
82,020.75 
90.635.72 

3.  Switchboards 

Total 

$230,016.41 

$243,143.00 

5.76% 

In  the  appraisal  represented  by  Table  XVII,  the  principal 
point  of  difference  between  the  Commission  and  the  Company 
was  the  cost  of  the  building,  which  includes  beside  the  sub« 
station  equipment,  a  garage  and  living  apartments  rented  tc 
tenants. 

The  building  costs  were  carefully  reviewed,  but  the  Commis- 
sion did  not  feel  justified  in  allowing  the  high  costs  claimed 
by  the  Company  which  were  taken  from  the  books  and  may  be 
accounted  for  by  costs  of  alterations. 


\ 


\ 


i 


TABLE  XVIII. 

OVERHEAD  SYSTEM. 

p.  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST. 


P.  S.  C. 

Estimated 

Cost. 


Company's 

Estimated 

Cost. 


Difference. 


1.  VSTood  Poles 

2.  Cross  Arms 

3.  Iron  Poles 

4.  Guy  Wires 

5.  Weather   Proof   Wire 

6.  Service  Taps   (without  wire) 

7.  Lighting  Arresters 

8.  Primary  Pole  Switches 

9.  Primary  Fuses 

10.  Wright    Demand   Meters 

11.  Special    Supports 

12.  Alley  Lamps  &  Brackets 

13.  Ground  Plates 

14.  Ground  Pipes 

15.  Three-Light   Iron    Poles 

16.  One-Light    Iron    Poles 

17.  Feeder  Tap  Delmar  Substa.. 

Subtotal 

General  Contingency  5% 

Total 


254,498.14 

87,458.25 

53,176.80 

32,480.00 

786,554.40 

79,852.40 

14,780.00 

6,380.00 

1,030.00 

5,413.50 

351.00 

4,529.80 

5,340.00 

3,719.00 

7,165.46 

2,804.34 

532.50 


254,498.14 

87,458.25 

58,070.28 

37,237.38 

882,208.30 

100,638.75 

14,780.00 

6,380.00 

1,030.00 

5,413.50 

351.00 

4,529.80 

5.340.00 

3,719.00 

7,165.46 

2,804.34 


1,346,065.69 
67,303.28 


$1,413,368.97 


1,471,624.20 
73,581.21 


$1,545,205.41 


9.33% 


TABLE  XIX. 

UNDERGROUND  SYSTEM. 

p.  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST. 


P.   S.  C. 

Estimated 

Cost. 


Company  s 

Estimated 

Cost. 


Difference. 


1.  Main    Cables 

2.  High   Tension   Cables 

3.  Lateral  Cables 

4.  Edison  Tube 

5.  Lateral    Conduits 

6.  Manholes  &  Service  Boxes.. 

7.  Extra   Depth    Manholes 

8.  City   of  St.   Louis  Joint 

9.  Main    Conduit    Joint 

10.  Cement    Lined    Conduits 

11.  Iron  Pipe  Conduits 

12.  Clay   Conduits 

13.  Monolithic  Conduits 

14.  Sewer  Connections.* 

15.  Bonds   to   Railway   Tracks... 

16.  Union  Portion  Feeders  20, 23,24 

17.  National  Subway  % 

General   Contingency   5% 

Total 


834,595.00 

496,528.30 

97,498.95 

69,268.90 

135,177.90 

203,949.36 

2,315.25 

26,985.95 

229,893.77 

37,081.58 

92,810.32 

381,047.30 

2,180.80 

4,650.00 

4,900.00 


114,592.98 


916 

500 

101 

85 

135 

213 

2 

27 

229 

37 

92 

375 

2 

4 

4 

23 

117 


,931.51 
,410.74 
,844.20 
,291.54 
,047.26 
,641.18 
,415.25 
,909.44 
,025.21 
,081.58 
,487.66 
,878.62 
,180.80 
,650.00 
,900.00 
,457.97 
,122.86 


2,733,476.36 
136,673.82 


$2,870,150.18 


2,870,275.82 
143,513.79 


3,013.789.61 


5.005% 


V 

Y 


44 


Report. 


Eeport. 


45 


Tables  XVIII  and  XIX  present  the  estimates  of  the  overhead 
and  underground  systems  respectively,  and  as  in  these  esti- 
mates the  Company's  engineers  followed  the  same  method  as  the 
Commission  has  throughout  the  appraisal,  i.  e.  working  from  a 
detailed  inventory,  the  different  items  are  able  to  be  compared. 

As  it  was  possible  here  to  compare  and  check  inventories  and 
prices,  one  with  the  other,  the  engineers  of  both  parties  were 
able  to  bring  several  of  the  items  to  an  absolute  agreement.  In 
some  items  the  Company  adopting  the  Commission's  figures, 
and  in  some  the  Commission  adopting  the  Company's.  The 
principal  differences  in  these  two  tables  resolve  themselves  into 
clear  cut  differences  of  opinion. 

The  principal  difference  in  the  overhead  estimates  arose  in 
the  items  of  weatherproof  wire  and  service  taps.  The  Commis- 
sion considered  the  Company's  claims  for  percentage  allowance 
for  sag,  wastage,  contingencies,  etc.,  on  the  item  of  weather- 
proof wire,  too  large  to  be  allowed,  and  the  quantity  of  wire  was 
also  affected  by  the  fact  that  the  Commission  could  not  accept 
the  Company's  records  as  to  the  number  of  service  taps  in  exis- 
tence. These  records  extended  back  over  some  eighteen  years, 
and  that  very  little  care  had  been  exercised  in  charging  off  the 
taps  was  evidenced  by  the  fact  that  they  showed  50  per  cent, 
more  taps  than  there  could  possibly  be  customers  for. 

The  principal  item  of  disagreement  in  the  underground  sys- 
tem (Table  XIX)  was  the  charges  for  training,  wastage,  and 
drawing  in  on  the  main  cables.  The  Company's  estimates  on 
these  items  being  higher  than  the  Commission  felt  justified  in 
allowing. 

The  item  of  5  per  cent,  general  contingency  allowance  on 
both  the  overhead  and  underground  w^as  agreed  upon  by  the  en- 
gineers of  the  Commission  and  of  the  Company,  but  this  item 
does  not  represent  all  of  the  contingency  allowance  made,  as 
most  of  the  items  in  the  Table  contain  some  special  percentages 
for  contingency. 


<L« 


-«i« 


TABLE  XX. 

MISCELLANEOUS  PHYSICAL  PROPERTY. 

p.  S.  C.  ESTIMATE  OF  CONSTRUCTION  COST; 


P.  S.  C. 

Estimated 

Cost. 


Company's 

Estimated 

Cost. 


Difference. 


1.  Building,  212  Gratiot  St 

2.  Isolated   Plants 

3.  Arc  Lamps 

4.  Nernst   Lamps 

5.  Motors  &  Fans 

6.  Transformers 

7.  Meters 

8.  Teams,  Wagons  &  Automobiles 

9.  Furniture 

10.  Station    Tools 

11.  Distribution  Tools 

Incidentals  and  Contingencies  5% 

on   Distribution    System,    Items 
3.  4,  5,  6,  7 

Total. 


[nc 


$     3,766.00 
30,969. OOf 

109,084.00 
44,818.00 
13,243.00 

183,411.00 

356,360.00 
45,589.00 
42,131.00 

in  Plants* 
13,577.00 


35,345.80 


$ 


3,766.00 

43,619.00 

116,521. oof 

45,163.00 

19,288.00 

182,534.00 

361,711.00 

45,589.00 

44,938.00 

32,724.00 


36,213.00 


$878,293.80 


$932,066.00 


6.12% 


♦Station    Tools    $19,146.32    Included    in    Plants. 

tHeating  pipe  work  from  10th   St.   Plant   contained  in   10th   St.   pipe 
work. 

Table  XX,  the  final  one  in  the  estimates  of  construction  cost, 
is  of  a  miscellaneous  nature,  with  no  items  of  marked  difference 
in  estimate,  except  as  explained  in  the  foot  note  to  the  Table. 

General  Contractor's  Profit. 

Item  A-IL,  Table  VIL 

The  Company's  claim  for  a  contractor's  profit  of  10  per  cent, 
to  be  added  to  the  construction  cost  of  the  plant  under  the  as- 
sumption that  in  rebuilding  the  plant  new  the  whole  work 
would  be  let  to  a  general  contractor,  illustrates  very  clearly  the 
diflFerence  in  treatment  of  the  whole  question  as  advanced  in 
their  theory  of  Cost  of  Reproduction  New,  and  the  method 
adopted  by  the  Commission. 

The  Commission  takes  the  position  that  as  a  matter  of  fact, 
there  was  no  general  contractor's  profit.  Moreover,  in  the  crea- 
tion of  such  plants  as  the  one  under  consideration,  as  they  are 
generally  created,  there  is  seldom  such  an  expenditure. 


46 


Report. 


It  has  been  argued  that  if  such  a  plant  were  to  be  created 
new  it  would  be  economy  to  employ  a  general  contractor,  but  in 
taking  the  figures  upon  which  to  base  their  profit,  the  Com- 
pany has  used  approximately  the  actual  construction  cost  of  a 
plant  created  without  such  contractor,  and  therefore  without  the 
assumed  consequent  economy.  These  facts  make  the  Com- 
pany's position  inconsistent,  and  would  prevent  the  contractor's 
profit  being  added  to  the  original  cost  even  if  the  Commission 
admitted  the  correctness  of  allowing  such  a  charge  to  enter  into 
the  value  of  the  property. 

Costs  of  Engineering. 

Item  3-7/.,  Table  VIII. 

Item  5-7/.,  Table  VII. 

In  the  item  of  engineering  costs  the  Commission  and  the 
Company  are  agreed  in  adopting  5  per  cent,  as  the  proper  per- 
centage. The  difference  in  the  resulting  figures  is  due  in  part 
to  the  difference  in  the  estimates  of  the  cost  of  construction,  and 
in  part  to  the  Commission's  not  allowing  a  contractor's  profit 
to  be  added  to  the  original  cost. 

INTEREST  ON  CONSTRUCTION  EXPENDITURES. 

Item  4-IL,  Table  VIII, 

Item  6-IL,  Table  VII. 

In  this  item  there  is  a  wide  difference  between  the  figures  of 
the  Commission  and  those  of  the  Company.  This  difference 
again  illustrates  the  wide  difference  in  results  obtained  in  as- 
suming a  hypothetical  set  of  conditions  as  is  done  by  the  Com- 
pany, and  in  considering  the  actual  conditions  as  is  done  by  the 
Commission. 


1 1 ) 


^\ 


i 


r 


Report. 


47 


TABLE  XXL 

INTEREST  DURING  CONSTRUCTION  ON  CONSTRUCTION  WORK 

ASHLEY  ST.  BUILDING. 

JULY  1ST,  1906,  ASSUMED  MEAN  DATE  OF  COMPLETION. 
Expenditures: 


Year. 

Amount. 

Time. 

Rate 
of  Int. 

From 

To 

• 

In't    Comp'd 
Annually. 

1902 
1903 
1904 
1905 

$100,595 
433,392 
210,628 
963,600 

4       yrs 
3       yrs 
2       yrs 
1       yr. 

6% 

« 

July  1st,  1902 
July  1st,  1903 
July  1st,  1904 
July  1st.  1905 

July  1st,  1906 
July  1st,  1906 
July  1st,  1906 
July  1st,  1906 

$26,406 
82,778 
26,034 
57,816 

January  1st 

,  1908,  assumed  mean  date  of  Completion  of  Addition. 

1906 
1907 
1908 

192,469 
124,637 

74,784 

Total. 

1»^   yrs 
%  yr. 
%  yr. 

6% 

<4 

July  1st,  1906 
July  1st,  1907 
July  1st,  1908 

Jan.   1st,   1908 
Jan.   1st,   1908 
Jan.  1st,  1909 

17,669 
3,739 
2,244 

$216,686 

In  Table  XXI  is  shown  in  detail  the  method  employed  by  the 
Commission  in  arriving  at  the  interest  during  the  period  of  con- 
struction for  the  Ashley  Street  building.  The  expenditures  and 
the  time  of  the  expenditures  as  used  in  this  Table  are  based 
upon  the  actual  expenditures  as  shown  to  the  Commission  in  the 
reports  of  the  Company's  accountants.  From  the  accountant 
figures  was  deducted  a  percentage  equal  to  the  percentage  of 
difference  betw^een  their  total  figures  for  the  building  and  those 
allowed  by  the  Commission. 

Compound  interest  on  these  results  was  then  computed  from 
the  time  the  expenditures  were  made,  up  to  July  1st,  1906,  the 
date  assumed  by  the  Commission,  as  the  mean  date  at  which  the 
building  began  to  be  fully  utilized. 


f  > 


48 


Report. 


TABLE  XXII. 

INTEREST    DURING  CONSTRUCTION   ON    CONSTRUCTION    OF 
ASHLEY  ST.  POWER  HOUSE  EQUIPMENT. 

MEAN  TIME. 


« 

Item. 

Amount. 

Time. 

Rate 
of  Int. 

Int.  Comp'd 
Annually. 

Boilers  (Edgemoore) 

$364,481 
349,320 
280,655 
574,801 
699,717 
498,137 
232,959 
19,339 

6  mos, 
1       yr. 
11/^  yr. 
1       yr. 
1%  yr. 
1%   yr, 
1'^  yr. 
6  mos. 

6% 

$   10,934 
20,959 
25,764 

Boilers  (Springfield) 

Steam  Piping 

Auxiliaries 

Engines 

34,488 

Electrical  Machinery ..'.'.' 

64,234 

45,729 

21,386 

580 

Switchboards 

Storage  Batteries *  . ' 

Station  Tools 

Total 

$224,074 

1 

In  Table  XXII  is  shown  the  interest  during  the  period  of  con- 
struction as  computed  by  the  Commission  on  the  equipment  of 
the  Ashley  Street  plant.  In  this  table  practically  the  same 
methods  are  pursued  as  in  Table  XXI.  The  interest  during  con- 
struction on  such  expenditures  as  engineering,  insurance,  taxes, 
etc.,  are  computed  for  the  Ashley  Street  plant  on  the  same  basis 
as  in  the  two  preceding  tables,  but  are  carried  into  the  totals 
in  another  table. 

In  computing  the  interest  during  construction,  on  the  plants 
and  equipment  other  than  that  of  Ashley  Street,  the  Commis- 
sion had  no  such  detailed  and  reliable  data  as  was  available  for 
Tables  XXI  and  XXII  and  for  this  work  was  compelled  to  use 
an  estimated  time  in  which  it  would  be  reasonable  to  suppose 
that  the  actual  investment  in  such  property  would  lie  idle  be- 
fore coming  into  use. 


i 


4  ( 


.  \ 


^ 


^ 


A 


yk 


Report.  ^g 


TABLE  XXIII. 

INTEREST    DURING    CONSTRUCTION    ON    CONSTRUCTION   OF 

PHYSICAL  PROPERTIES. 

MEAN  TIME  OF  CONSTRUCTION. 


Property. 

Amount. 

Mean 
Time. 

Rate 
of  Int. 

Interest. 

Ashley  St.  Building 

$216,686 

224,074 

19,629 

Ashley   St.   Equipment 

i 

Lewis  St.  Plant 

Substation  No.  3  &  10th  St.  P.  Sta. 
Building  &  Equipment 

$    654,309.38 

625,950.09 
45,131.48 

202,959.63 
209,020.90 

6  mos. 

6  mos. 
3  mos. 

6  mos. 
6  mos. 

6% 

6% 
6% 

6% 
6% 

Series  Arc  Apparatus 

18,779 

(No  Int.  on  Station  Tools.) 
Substation  No,  1 

677 

Substation  No.  2 

6,089 

Substation  No.  4 ',[ 

6,271 

Building   and    Equipment 

(No    Int.    on    dismantled 
equipment.) 
Stable,   Station   B. 

Building  &  Switchboard 

(No    Int.    on    dismantled 
equipment.) 

Building  212  Gratiot  St 

Substation   No.    5 

148,812.09 

99,301.27 

3,766.00 
230,016.41 

6  mos. 

6  mos. 

6  mos. 
6  mos. 

6% 

6% 

6% 
6% 

'4,464 

2,979 
113 

Substation   No.    7 

6,900 

Underground    System. 

Cables,  Edison  Tube,  Bonding  & 
Contingencies,     Laterals     ex- 
cluded  

1,475,556.81 

1,150,282.68 
1,173,864.42 

4  mos. 

9  mos. 
4  mos. 

6% 

6% 
6% 

Conduit  System,  Conduits,  Man- 
holes, etc.,  excluding  pipe  lat- 
erals  

29,511 

Overhead  System,  excluding  serv- 
ice taps 

51,763 

23,477 

On  Engineering. 

Ashley  St 

611,412 

21,514 
8,533 
1,712 

15,927 

37,835 

28,847 

Other  than   Ashley  St 

On  Taxes  Ashley  St 

i 

•    ■••••• 

On    Real    Estate. 

Ashley  St 

100,000 
314,240 

1 

5%   yrs. 
1%  yrs. 

6% 
6% 

Other   than   Ashley  St .' 

Total ; 

$725,780 

1 

t 

Table  XXIII  shows  the  summary  of  interest  during  the 
period  of  construction,  as  determineci  by  the  Commission,  for 
the  whole  property,  except  as  allowed  in  Item  I.,  Table  VIII. 
For  the  information  of  the  layman  it  might  be  well 
to  explain  that  in  the  column  headed  ''mean  time,"  the 
figures  do  not  represent  the  time  estimated  by  the  Commission 
as  necessary  to  build  and  bring  into  operation  these  particular 
items,  but  it  represents  the  "mean  time"  over  which  the  ex- 
penditures were  spread  until  operation  began.     This  "mean 


I 


50 


Report. 


time"  is  assumed  to  be  one-half  of  the  actual  period  of  con- 
struction, and  the  Commission's  estimate  of  the  time  required  to 
construct  and  bring  into  operation  can  be  obtained  by  multiply- 
ing each  item  of  time  by  two  except  real  estate. 

As  a  very  marked  illustration  of  the  difference  in  results 
caused  by  adopting  the  Commission's  method  of  considering 
actual  conditions  instead  of  the  hypothetical  conditions  assumed 
by  the  Company,  we  would  call  attention  to  the  item  of  interest 
during  construction  on  real  estate.  Under  the  assumed  condi- 
tions as  used  under  the  theory  of  Cost  of  Reproduction  New,  the 
present  value  of  the  real  estate  as  estimated  by  the  Company  was 
taken  as  a  basis,  and  to  this  was  added  compound  interest  Jor 
a  number  of  years  to  come.  It  is  evident  that  if  such  a  method 
of  valuation  were  allowed,  the  present  consumer  would  be  re- 
quired to  pay  now  not  merely  on  a  high  present  value,  but 
even  on  a  still  higher  future  value. 

The  wide  difiFerence  between  the  Company's  and  the  Com- 
mission's figures  on  this  item  is  due  to  the  Commission's  be- 
lief that  in  dealing  with  interest  during  construction  the  Com- 
pany is  wrong  in  theory,  that  its  assumptions  are  not  in  ac- 
cordance with  the  real  facts  in  the  case,  and  that  the  results  ar- 
rived  at  are  unreasonable. 

Taxes  and  Insurance  During  Construction. 

Item  5-77.,  Table  VIII. 
Item  7-77.,  Table  VII. 

As  an  element  of  value  this  item  is  entirely  legitimate,  and 
the  only  question  is  as  to  the  reasonableness  of  the  amount 
claimed. 

By  going  to  the  tax  records  of  the  city  the  Commission  finds 
during  the  years  of  construction  of  the  Ashley  Street  plant  the 
assessed  value  of  this  property  (real  estate  and  buildings)  was 
as  shown  in  Table  XXIV. 


\ 


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A 


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4 1 


t 


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Report. 


51 


TABLE  XXIV. 

TAXES  ON  ASHLEY  ST.  PLANT  DURING  CONSTRUCTION. 

JULY  1ST,  1906,  assumed  MEAN  DATE  OF  COMPLETION. 


Year 


Assessed 
Value. 


Tax 
Rate. 


Amount 
of  Taxes. 


1902 
1903 
1904 
1905 
1906 


$   62,720 

62,720 

242,720 

362,720 

462,720 

Total 


1.95 
2.15 
2.19 
2.19 
2.10 


$1,223.04 
1,348.48 
5,315.57 
7,943.57 
9,717.12 


$25,547.78 


Not  being  able  to  ascertain  the  assessed  values  of  the  other 
pieces  of  property  during  the  year  of  their  construction,  the 
Commission  has  allowed  the  taxes  as  of  the  year  1909.  The  item 
is  small  so  the  variation  from  what  was  actually  paid  is  of  no 
importance. 

TABLE  XXV. 

TAXES  ON  REAL  ESTATE  OTHER  THAN  ASHLEY  ST.  PLANT. 

FOR  ONE  YEAR  ONLY. 


Location. 


City 
Block 


Assessed 
Value. 


Taxes. 


Lewis   St.   Plant 

Substa.  No.  3  &  10th  St.  P.  Sta 

Substation  No.  1 

Substation  No,  2 

Substation  No.  4 

Stable,  Station  B 

Building  212  Gratiot  St 

Substation  No.  5 

Substation  No.  7 

Total 


226 

272 

95 

84 

900 

2,286 

50 

3,753 

164 


$14,400.00 
62,550.00 
10,640.00 
13,440.00 
62,780.00 
21,000.00 
1,690.00 
2,850.00 
20,400.00 


$    319.68 

1,388.61 

236.21 

298.37 

1,392.72 

466.20 

37.52 

63.27 

452.88 


$4,655.46 


In  the  matter  of  fire  and  liability  insurance  during  construc- 
tion, the  Commission  has  made  such  estimates  as  were  pos- 
sible, based  on  the  available  data  and  believes  that  the  allow- 
ances in  this  item  are  ample  to  cover  the  actual  expenditures. 


r' 


I 


III 


52 


Report. 


Working  Capital. 

Item  III,  Table  VIII. 

Item  S'lL,  Table  VII. 

In  this  item  the  Company  has  not  presented  full  details,  but 
as  the  figures  correspond  very  closely  to  those  of  the  Commis- 
sion's, it  is  to  be  supposed  that  their  methods  were  similar. 


Edison  License  Agreement. 

Item  9-77.,  Table  VII. 

Among  the  assets  claimed  by  the  Company  is  an  item  of 
$200,000  the  value  claimed  by  it  for  a  contract  between  the 
General  Electric  Co.,  of  New  York,  and  the  Edison  Illuminating 
Co.  of  St.  Louis,  dated  November  10,  1892,  whereby  the  Gen- 
eral Electric  Co.,  in  consideration  of  $500,000  of  stock  and 
$300,000  bonds  of  the  Edison  Co.,  granted  that  Company  one 
of  the  predecessors  of  the  present  Company,  the  right  to  the 
exclusive  use  in  the  City  of  St.  Louis  and  adjacent  territory,  of 
apparatus  manufactured  by  the  licensor,  under  letters  patent 
held  by  it,  and  also  the  right  to  purchase  such  patented  appar- 
atus as  it  might  need,  at  prices  as  low  as  that  made  by  the 
licensor  to  its  other  licensees. 

It  appears  that  the  principal  patents  which  this  contract 
licensed  the  Edison  Co.  to  use  have  expired,  and  it  is  admitted 
that  what  value  this  contract  had  on  account  of  the  license  to 
use  such  patents  is  now  gone. 

It  also  appears  that  the  apparatus  now  manufactured  by  the 
General  Electric  Co.,  is,  in  the  main,  sold  in  competition  with 
goods  of  similar  character,  manufactured  by  others. 

It  is  claimed  that  it  is,  and  has  always  been,  the  practice  of  the 
General  Electric  Co.  to  give  a  special  discount  to  its  licensees 
on  all  material  bought  by  such  licensees,  the  amount  of  which 
discount  is  fixed  by  the  General  Electric  Co.,  and  the  Union 


<\^ 


r*4 


%\ 


^ 


€ 


Report. 


53 


Electric  Light  and  Power  Co.,  as  assignee  of  the  rights  under 
that  contract  has  had  and  still  has  the  benefit  of  this  discount, 
which  amounts  in  the  aggregate  to  several  thousand  dollars 
each  year.  And  the  Company  now  claims  that  the  privilege 
of  receiving  these  discounts  is  a  right  derived  under  this  con- 
tract, and  gives  the  contract  a  value  of  $200,000.  The  one 
clause  in  the  contract  under  which  it  is  or  can  be  claimed  that 
these  licensee  discounts  are  a  legal  right  under  this  contract, 
is  as  follows: 

"The  Licensor  hereby  covenants  to  sell  to  the  Licensee  from 
time  to  time,  for  cash,  or  on  such  terms  as  may  be  agreed  upon, 
such  apparatus  as  at  the  time  may  regularly  be  made  by  or  for 
the  Licensor,  and  may  be  needed  by  the  Licensee  for  its  use  in 
said  territory  for  central  station  lighting,  at  the  lowest  current 
prices  of  the  Licensor  to  its  other  Lic-ensees  under  this  form  of 
contract  and  license  for  similar  apparatus  purchased  in  like 
quantities.^'  This  language,  in  the  opinion  of  the  Commis- 
sion, gives  the  licensee  no  right  whatever  to  any  discount.  In- 
deed it  seems  to  us  to  do  no  more  than  to  protect  this  licensee 
against  discrimination  in  favor  of  other  licensees  of  the  Gen- 
eral Electric  Co.  If  the  Union  Co.  has  a  right  to  receive  dis- 
counts from  the  General  Electric  Co.,  it  is  not  by  reason  of  the 
Edison  licensee  contract,  and  we  therefore  can  see  no  sub- 
stantial pecuniary  value  in  this  contract. 

KiNLOCii  Pole-Right  Agreement. 

Item  IV.,  Table  VIII. 

Item  10-11. ,  Table  VII. 

This  item  represents  a  written  agreement  between  the  Citi- 
zens Electric  Light  Company,  and  the  Kinloch  Telephone  Com- 
pany, by  virtue  of  which  the  Union  Electric  Light  and  Power 
Company  as  holder  of  the  rights  of  the  Citizens  Electric  Light 
Co.  has  the  right  to  string  its  wires  free  of  rental  on  any  of  the 
poles  of  the  Kinloch  Company,  so  long  as  they  do  not  interfere 
with  its  business  or  operations. 

At  the  date  of  the  investigation  the  Union  Company  had  on 
the  poles  of  the  Kinloch  Company,  cross-arms,  half  cross-arms, 


54 


Report. 


K 


it 


transformers  and  iron  pipe  laterals,  for  which  if  rent  were 
charged  at  the  usual  prices  it  w^ould  pay  as  follows : 

TABLE  XXVI. 

9103  Cross-arms  @$  .60  =  $5,461.80  per  year 

269  Half     "  @     .40  =       107.60       " 

2  Transformers         @  1.20  =  2.40 

9  Iron  Pipe  laterals  @  1.00  =  9.00 

Total  rental,  $5,580.80 

Capitalizing  this  rental  which  is  saved  by  the  Kinloch  Pole 
agreement,  at  8  per  cent.,  the  rate  of  return  hereinafter  al- 
lowed, we  arrive  at  a  value  of  $69,760.00.  This  is  the  value 
to  the  Union  Company  on  the  basis  of  the  present  occupancy  of 
the  poles,  but  as  the  agreement  gives  them  the  right  to  extend 
this  free  use  of  the  poles  to  all  the  poles  of  the  Kinloch  Com- 
pany, the  Commission  has  made  a  further  allowance  of  value  up 
to  $80,000. 

Cost  of  Establishing  the  Business. 
Item  v.,  Table  VIII. 

During  the  first  few  years  of  nearly  all  large  enterprises 
there  is  generally  a  period  of  loss  due  to  the  business  not  be- 
ing yet  established.  These  initial  losses  are  so  much  a  matter 
to  be  taken  into  account  that  thev  amount  almost  to  the  same 
thing  as  a  predetermined  expense,  even  in  enterprises  established 
with  the  best  judgment  and  foresight.  They  are  in  fact  a  part 
of  the  legitimate  investment,  and  in  attempting  to  arrive  at  the 
fair  Earning  Value  of  a  public  service  property  a  reasonable 
allowance  for  these  initial  losses  should  in  justice  be  taken  into 
account  as  legitimate  costs  of  establishing  the  business  and 
should  be  admitted  into  the  Earning  Value  as  a  part  of  the  in- 
vestment. It  must  not  be  taken  as  granted,  however,  that  there 
is  not  a  reasonable  limit  to  which  these  initial  losses  must  be 
confined  in  admitting  them  to  Earning  Value.  An  exorbitant 
figure  in  the  cost  of  establishing  a  business  might  very  w^ell  be 
caused  by  faulty  accounting  or  from  causes  which  should  not 
work  to  the  prejudice  of  the  consumers. 

The  Commission  considers  that  it  is  dealing  exclusively  with 
the  affairs  of  the  present  Company,  and  is  not  called  upon  to 


1> 


»' 


a\ 


\ 


> 


« 

V 


Report. 


55 


take  into  account  the  affairs  of  former  or  predecessor  companies 
any  further  than  is  necessary  in  determining  the  value  of  the 
present  existing  property.  Yet,  that  amount  of  the  cost  of  estab- 
lishing the  business  of  the  former  Companies,  by  which  the 
present  Company  and  the  present  consumers  are  being  benefit- 
ed, is  a  justly  allowable  element  in  the  present  Earning  Value 
of' the  property.  Unfortunately,  there  is  no  very  accurate 
method  of  determining  this  figure,  and  on  account  of  the  very 
unreliable  sources  of  the  items  in  the  earlier  history  of  the  pre- 
decessor Companies,  which  are  in  many  cases  influenced  bj 
stock  and  bond  transactions  and  speculative  financiering,  the 
Commission  is  forced  to  make  simply  a  general  estimate  or  al- 
lowance in  the  present  value  for  the  cost  of  establishing  the 
business  of  the  former  Companies.  This  allowance  is  based  on 
a  very  careful  study  and  review  of  all  the  data  available,  and  a 
careful  consideration  of  all  the  circumstances  and  conditions 
known  to  the  Commission. 

The  investment  in  new  plant  by  the  present  Company  came 
into  operation  as  an  earning  power  at  an  approximate  mean  date 
of  July  1st,  1906.  Up  to  that  date,  so  far  as  the  present  valua- 
tion is  concerned,  there  can  be  said  to  have  been  no  loss  on  the 
new  investment,  for  it  was  earning  the  6  per  cent,  compound 
interest,  which  as  Interest  during  Period  of  Construction  has 
been  added  to  the  capital  to  be  earned  on,  and  it  is  considered 
that  on  this  new  plant  there  should  be  no  charges  for  the  depre- 
ciation fund  before  the  date  of  its  completion. 

It  appears  that  the  period  for  determining  the  Cost  of  Estab- 
lishing the  Business  on  the  investment  in  new  plant  should  be- 
gin as  of  July  1st,  1906,  and  a  careful  study  of  the  operations 
since  that  date  convinces  the  Commission  that  any  allowable 
deficit  has  been  cared  for  in  the  allowance  hereinafter  made. 
In  considering  this  item  of  Cost  of  Establishing  the  Business, 
we  must  recognize  that  this  case  differs  from  the  ordinary  case, 
in  that  the  present  Union  Electric  Light  and  Power  Company 
at  the  time  of  its  organization  took  over  a  going  business  previ- 
ously carried  on  by  its  predecessor  Companies,  the  Union  Elec- 
tric Light  and  Power  Co.  No.  1  and  the  Missouri  Edison  Elec- 
tric Co.,  and  that  later,  in  1907,  it  acquired  by  purchase  all  the 
property  and  the  business  of  the  Laclede  Power  Company,  and 
in  consequence  did  not  incur  the  expenses  usually  incident  to 
the  establishment  of  its  business  by  a  new  Company.     It  is 


lil 


ti 


1^1 


56 


Report. 


proper,  however,  that  in  determining  the  Cost  of  Establishing 
the  Business  of  the  present  Company,  allowance  should  be  made 
for  the  Cost  of  Establishing  the  Business  which  the  present 
Company  acquired  from  these  other  Companies. 

The  Commission  considers  that  an  allowance  of  $1,000,000 
is  ample  to  cover  all  costs  of  Establishing  the  Business,  so  far 
as  they  enter  into  the  present  Earning  Value  of  this  property. 

Miscellaneous  Suggested  Elements  of  Value. 

As  a  note  to  its  presentation  of  a  value  in  Table  VII,  the  Com- 
pany makes  some  suggestions  as  to  possible  additional  elements 
of  value. 

The  suggestions  can  be  treated  briefly  in  order: 

(a)  Going  Value. 

This  element  in  valuations  for  rate  making  purposes  is  iden- 
tical with  Cost  of  Establishing  the  Business.  It  has  been  dis- 
cussed under  that  head  in  this  report  and  allowance  made  for 
it  in  Item  V.,  Table  VIII. 

(b)   Profits  of  Promotion. 

This  item  has  been  dealt  with  under  the  head  of  ''Organiza- 
tion'^  or  "Development;'*'  see  pages  31  and  32. 

(c)   Discount  of  Bonds. 

The  Company  claims  that  the  discount  on  the  bonds  issued 
by  it,  as  well  as  the  discount  on  the  bonds  issued  by  predecessor 
Companies  and  constituting  a  lien  on  property  acquired  by  it, 
is  a  just  item  of  permanent  capitalization.  The  Company,  on 
its  books,  seems  to  make  a  distinction  in  this  connection  between 
the  bonds  issued  to  obtain  money  for  construction  purposes  and 
bonds  disposed  of  to  refund  existing  indebtedness.  As  to  the 
former  it  treats  the  discount  as  part  of  the  cost  of  construction 
to  be  capitalized  in  the  same  manner  as  the  actual  investment 
in  construction,  whereas,  as  to  the  latter  it  charges  the  same 
as  an  item  of  deferred  indebtedness.  The  Company's  expert 
accountants,  however,  insist  that  all  this  discount  is  properly 
chargeable  to  cost  of  construction,  and  the  Company  asks  that 
the  discount  on  all  the  bonds,  irrespective  of  the  purpose  for 
which  the  proceeds  were  used,  be  recognized  by  the  Commission 
as  part  of  its  capital  invested. 


^> 


ih 


V 


Report. 


57 


We  do  not  see  that  any  principle  can  be  invoked  which  will 
justify  the  distinction  suggested  by  the  books  of  the  Company, 
nor  do  we  believe  that  discount  on  bonds  in  any  case  should  be 
treated  as  part  of  the  capital  invested.  The  sale  of  bonds  at  a 
discount  has  the  result  in  all  cases  simply  of  increasing  the  rate 
of  interest  paid  for  the  money;  the  lower  the  rate  of  interest 
borne  by  the  bonds  the  greater  the  discount  will  be,  and  vice 
versa. 

We  fail  to  see  why  the  purposes  for  which  the  money  is  bor- 
rowed should  determine  or  affect  the  mode  in  which  the  cost 
of  the  money  or  any  part  therof  should  be  treated.  The  cost  of 
money  to  the  Company  should,  of  course,  be  recognized  in  the 
rate  which  the  Company  is  allowed  to  earn  on  its  investment, 
provided  of  course,  that  the  necessity  for  discounting  the  bonds 
is  not  occasioned  by  the  Company's  credit  having  been  impaired 
by  improper  financial  management. 

We  are  aware  that  it  has  been  quite  customary  for  corpora- 
tions to  capitalize  bond  discount,  and  that  there  is  very  respect- 
able authority  for  such  course,  but  the  reasons  given  in  justifi- 
cation do  not  convince  us  of  its  correctness,  and  we  are  fortified 
in  our  position  by  the  fact  that  the  Interstate  Commerce  Com- 
mission has  not  long  since  adopted  the  principle  which  we  have 
announced.  If  bond  discount  is  permitted  to  be  capitalized  it 
would  in  many  cases  require  but  three  or  four  issues  of  renewal 
bonds  before  at  least  half  of  the  bonded  debt  would  represent 
nothing  but  discount.  The  discount  should,  in  our  opinion,  be 
treated  as  interest  to  be  paid  out  of  the  fair  rate  of  return  allowed 
on  the  Earning  Value  of  the  property. 

(d)   Franchise  Value. 

The  Commission,  in  determining  the  property  on  which  the 
Company  is  entitled  to  earn  a  return,  has  not  taken  into  consid- 
eration its  franchise  rights,  for  the  reason  that  in  our  opinion 
the  Company  is  not  entitled  to  earn  a  return  on  such  franchises. 
The  value  of  a  franchise  is,  after  all,  determined  in  the  final  esti- 
mate by  the  amount  which  the  Company  is  enabled  to  earn 
under  it,  and  if  by  reason  of  legislative  regulation  and  limi- 
tation of  such  return,  the  Company  may  only  earn  a  reason- 
able return  on  its  investment,  the  franchise  would  seem  to  have 
no  substantial  value.    This  view  is  recognized  by  the  Supreme 


> 


I 


<l 


(■  I 


58 


Report. 


Court  of  the  United  States  in  its  opinion  in  the  case  of  Wilcox  vs. 
Consolidated  Gas  Co..  212  U.  S.,  19,  and  although  in  that  case 
the  Court  approved  of  the  allowance  of  a  substantial  value  for 
the  franchises  of  the  Gas  Company,  it  did  so  on  the  sole  ground 
that  the  State  itself  had  expressly  permitted  the  Company  to 
capitalize  this  franchise  value  at  the  time  of  its  incorporation, 
and  the  value  allowed  bv  the  Court  was  the  value  at  which  these 
franchises  were  originally  permitted  to  be  included  in  the 
assets  of  the  corporation  as  part  of  its  capitalization.  But  the 
Court,  in  discussing  the  value  of  the  franchise  further,  uses 
the  following  language: 

"Its  past  value  was  founded  upon  the  opportunity  of  ob- 
taining these  enormous  and  excessive  returns  upon  the 
property  of  the  Company  without  legislative  interference 
with  the  price  for  the  supply  of  gas,  but  that  immunity 
was  of  course  uncertain,  and  the  moment  it  ceased  and  the 
legislature  reduced  the  earnings  to  a  reasonable  sum,  the 
great  value  of  the  franchise  would  be  at  once  and  unfavor- 
ably affected." 

We  have  in  this  State,  laws  calling  for  the  taxing  of  fran- 
chises, and  it  is  sometimes  argued  that  a  value  having  been  as- 
signed to  franchises  for  taxation,  it  must  follow  that  they  should 
be  allowed  equal  value  for  rate  making  purposes.  But  the 
Court  in  the  above  case  expressly  held  that  "the  fact  that  the 
State  has  taxed  the  Company  on  its  franchises  at  a  greater  value 
than  is  awarded  them  here  is  not  material." 

At  any  rate,  under  regulations,  the  charges  are  supposed  to 
be  adjusted  so  as  to  bring  a  fair  return  to  the  Company  over  and 
above  the  gross  expenses,  and  as  taxes  are  a  part  of  these  ex- 
penses, the  consumer,  not  the  Company,  really  pays  the  taxes. 

Above  all  other  reasons  for  not  allowing  franchise  value  in 
this  case,  stands  the  simple  fact  that  the  franchises  were  given 
free  by  the  public.  They  cannot  then,  with  justice,  be  valued 
against  the  public  in  establishing  the  rates. 

(e)   Assets  Not  Included  in  Estimated  Cost  of  Reproduction. 

Item  (e)  is  of  such  an  indefinite  character  that  it  can  hardly 
be  discussed  with  profit. 


^t 


A. 


y 


J' 


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i 


4 


V 


Report. 


(f)  Net  Investment  in  Superseded  Property. 


59 


The  Commission  is  endeavoring  to  arrive  at  a  fair  value  of 
the  property  at  present  in  the  service  of  the  public  and  does 
not  consider  that  abandoned  property  enters  into  the  calculation 
except  so  far  as  it  affects  the  Cost  of  Establishing  the  Business 
for  which  item  allowance  has  already  been  made. 

EARNING  VALUE  OF  THE  PRESENT  PROPERTY. 

Following  numerous  decisions  of  the  Courts,  the  Commission 
believes  that  the  Earning  Value  for  rate  making  purposes  should 
be  the  value  of  the  property  at  the  time  of  the  investigation. 
In  arriving  at  this  value  it  is  necessary  then  to  allow  for  an  In- 
creased value  in  the  real  estate  or  other  items,  and  to  take  into 
consideration  the  effect  of  the  present  condition  of  the  prop- 
erty. 

So  far  as  cost  of  construction  is  concerned,  the  figures  of 
Table  VIII  as  stated  before,  can  be  used  either  as  original  cost 
or  as  present  cost. 

The  figures  for  other  items  in  Table  VIII  can  also  be  used 
either  as  original  cost  or  as  present  cost  under  conditions  similar 
to  the  actual  conditions  as  they  existed  in  the  creation  of  the 
property. 

The  present  value  of  the  real  estate  has  been  treated  on  pages 
33  to  38  inclusive  of  the  report,  and  the  value  allowed  by  the 
Commission  established  at  $800,000. 

In  depreciating  to  arrive  at  the  present  value  of  the  depre- 
ciable property,  the  Commission  does  not  consider  it  fair  to  make 
deductions  for -anything  but  the  present  physical  condition,  and 
for  items  where  it  is  plainly  apparent  that  the  property  has  be- 
come obsolete  or  inadequate.  The  usual  estimate  of  the  life  of 
different  parts  of  a  public  service  property,  so  far  as  they  deal 
with  obsolescence  or  inadequacy,  are  extremely  problematical 
and  these  elements  should  not  be  generally  taken  into  account  in 
determining  present  value. 

Depreciation  for  present  value  is  not  the  same  calculation 
as  the  estimate  of  yearly  depreciation  for  the  purposes  of  estab- 
lishing the  necessary  depreciation  fund.  This  latter  phase  of 
the  question  will  be  dealt  with  fully  in  another  part  of  the  re- 
port. 


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Report. 


Table  XXVII  shows  the  details  of  the  depreciation  for  present 
condition  on  the  plants  of  the  Company  as  determined  by  the 
Commission. 

Any  depreciation  for  present  condition  is  necessarily  based 
almost  entirely  upon  the  opinion  of  the  individual  making  the 
estimate,  and  having  this  in  mind  the  Commission  has  endeav- 
ored to  make  the  figures  so  conservative  that  they  cannot  reason- 
ably be  objected  to. 

TABLE  XXVIII. 

ESTIMATED  EARNING  VALUE  OF  TOTAL  PRESENT  PROPERTY. 


I.     Organization — 

1.  Expense    of   Organization 

2.  Interest   on   Organization   Expense 

II.     Construction — ■ 

1.  Present  Value  of  Real  Estate 

2.  Cost  of  Construction 

3.  Cost  of  Engineering 

4.  Interest  on  Construction  Expenditure.... 

5.  Taxes  and  Insurance  during  Construction 

III.  Working  Capital 

IV.  Kinloch   Pole   Contract 

V.     Allowance  for  Cost  of  Establishing  Business.. 

Deduct   Depreciation    for    Present   Condition 

Total    Earning    Value 


I      125,500 
3^944 


800,000 
12.586,741 
629,3.37 
725,78a 
130,203 

865,520 

80,000 

1,000,000 

$16,976,025 

841,632 
$16,134,393 


Table  XXVIII  shows  the  present  Earning  Value  of  the  whole 
property  of  the  Company  as  determined  by  the  Commission. 

SEGREGATION  OF  VALUE  IN  THE  SERVICE  OF  THE 

UNITED  RAILWAYS. 

In  trying  to  determine  the  amount  of  Earning  Value  upon 
which  the  public  should  pay  a  fair  return,  the  Commission  is, 
in  the  case  of  the  Union  Electric  Light  and  Power  Company, 
confronted  by  a  difficult  problem,  in  that  approximately 
half  of  the  kilowatt  hours  of  electricity  sold  by  the  Company  is 
sold  not  to  the  general  public  but  to  one  large  customer,  name- 
ly, the  United  Railways  Company. 

As  the  United  Railways  Company  uses  none  of  the  distribu- 
tion equipment  of  the  Union  Company,  it  becomes  necessary 
in  order  to  calculate  the  proportion  of  the  fair  return  to  be 
borne  by  the  Railways  Company  and  by  the  general  consumers, 


Report. 


65 


i\ 


r 


to  segregate  that  portion  of  the  investment  demanded  for  the 
use  of  the  Railways  from  the  property  as  a  whole. 

It  has  been  argued  by  the  Company  that  inasmuch  as  the  in- 
creased volume  of  business  resulting  from  their  contract  with 
the  Railways  Company  enables  the  cost  of  generating  electricity 
to  be  considerably  reduced,  this  portion  of  the  business  is  of 
great  advantage  to  the  general  consumer  and  should  not  be 
made  to  bear  its  full  proportion  of  the  Investment  Charge.  As 
a  matter  of  fact  the  advantage  is  mutual.  The  cost  of  genera- 
tion to  the  general  consumer  would,  it  is  true,  be  greater  with- 
out the  business  of  the  Railways,  but  on  the  other  hand  the 
cost  to  the  Railways  would  be  greater  without  the  general  con- 
sumer. Still  more  pertinent  is  the  fact  that  the  cost  of  genera- 
tion is  in  reality  a  minor  item  in  electric  rates,  by  far  the 
greater  cost  being  in  the  Investment  Charges.  The  cost  of  gen- 
erating electricity  by  the  Union  Electric  Light  and  Power 
Company  is  less  than  one-half  cent  per  kilowatt  hour,  and  even 
if  the  railway  business  were  to  assume  all  of  the  generating  cost, 
the  consumers  rate  would  only  be  reduced  one-half  cent  or 
less,  while  the  assumption  of  the  Investment  Charges  of  the 
railway  load  by  the  general  consumer  would  amount  to  much 
more  than  this. 

A  further  and  very  important  consideration  taken  into  ac- 
count in  deciding  this  point  is  the  fact  that  at  the  time  the  origi- 
nal contract  for  this  railway  business  was  entered  into,  both 
companies  were  controlled  by  the  same  owners  as  they  are  today. 
This  Commission  believes  and  wishes  to  establish  as  a  precedent 
that  under  such  circumstances  it  is  especially  to  be  insisted 
upon  that  transactions  between  public  service  corporations 
should  be  very  carefully  reviewed  by  the  regulating  officials. 

The  conclusion  in  this  case  cannot  be  avoided  that  unless 
the  railway  contract  is  made  to  bear  its  proper  amount  of  In 
vestment  Charges  the  result  would  be  a  serious  discrimination 
against  the  general  consumer. 


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64 


Report. 


Table  XXVII  shows  the  details  of  the  depreciation  for  present 
condition  on  the  plants  of  the  Company  as  determined  by  the 
Commission. 

Any  depreciation  for  present  condition  is  necessarily  based 
almost  entirely  upon  the  opinion  of  the  individual  making  the 
estimate,  and  having  this  in  mind  the  Commission  has  endeav- 
ored to  make  the  figures  so  conservative  that  they  cannot  reason- 
ably be  objected  to. 

TABLE  XXVIIL 

ESTIMATED  EARNING  VALUE  OF  TOTAL  PRESENT  PROPERTY. 


I.     Orgranization — 

1.  Expense    of   Org^anization 

2.  Interest   on   Organization  Expense 

II.     Construction — 

1.  Present  Value  of  Real  Estate 

2.  Cost  of  Construction 

3.  Cost  of  Engineering 

4.  Interest  on  Construction  Expenditure.... 

5.  Taxes  and  Insurance  during  Construction 

IIL     Working  Capital 

IV.     Kinloch   Pole   Contract 

V.     Allowance  for  Cost  of  Establishing  Business.. 

• 

Deduct   Depreciation   for   Present   Condition 

Total    Earning    Value 


I      125,500 
3^944 


800,000 
12.586,741 
629,337 
725,780 
130,203 

865,520 

80,000 

1.000,000 

$16,976,025 

841,632 
$16,134,393 


Table  XXVIII  shows  the  present  Earning  Value  of  the  whole 
property  of  the  Company  as  determined  by  the  Commission. 

SEGREGATION  OF  VALUE  IN  THE  SERVICE  OF  THE 

UNITED  RAILWAYS. 

In  trying  to  determine  the  amount  of  Earning  Value  upon 
which  the  public  should  pay  a  fair  return,  the  Commission  is, 
in  the  case  of  the  Union  Electric  Light  and  Power  Company, 
confronted  by  a  difficult  problem,  in  that  approximately 
half  of  the  kilowatt  hours  of  electricity  sold  by  the  Company  is 
sold  not  to  the  general  public  but  to  one  large  customer,  name- 
ly, the  United  Railways  Company. 

As  the  United  Railways  Company  uses  none  of  the  distribu- 
tion equipment  of  the  Union  Company,  it  becomes  necessary 
in  order  to  calculate  the  proportion  of  the  fair  return  to  be 
borne  by  the  Railways  Company  and  by  the  general  consumers, 


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to  segregate  that  portion  of  the  invest meiit  deiii^tKdkxl  IVir  iIm 
use  of  the  Railways  from  the  property  as  a  whofe. 

It  has  been  argued  by  the  Company  that  insismuoh  a^  iW  in- 
creased volume  of  business?  resulting  fmiu  their  contr*rt  witli 
the  Railways  Company  enables  the  eotst  of  g^nemlin^  eKvirieily 
to  be  considerably  reduced,  this  portion  of  the  bosiue???  is  *nf 
great  advantage  to  the  general  consumer  and  shi>uM  ut»*  lie 
made  to  bear  its  full  proportion  ef  the  Investment  Char^\  As 
a  matter  of  fact  the  advantage  is  mutual.  The  e^>c<t  df  ^Hier*- 
tion  to  the  general  consumer  would,  it  is  tme.  be  greater  with* 
out  the  business  of  the  Railways,  but  on  the  other  hand  th^ 
cost  to  the  Railways  would  be  greater  without  the  general  eiHJ- 
sumer.  Still  more  pertinent  is  the  fact  that  the  cost  of  genera- 
tion is  in  reality  a  minor  item  in  electric  rates,  by  far  the 
greater  cost  being  in  the  Investment  Charges.  The  cost  of  gen- 
erating electricity  by  the  Union  Electric  Light  and  Power 
Company  is  less  than  one-half  cent  per  kilowatt  hour,  and  even 
if  the  railway  business  were  to  assume  all  of  the  generating  cost, 
the  consumers  rate  would  only  be  reduced  one-half  cent  or 
less,  while  the  assumption  of  the  Investment  Charges  of  the 
railway  load  by  the  general  consumer  would  amount  to  much 
more  than  this. 

A  further  and  very  important  consideration  taken  into  ac- 
count in  deciding  this  point  is  the  fact  that  at  the  time  the  origi- 
nal contract  for  this  railway  business  was  entered  into,  both 
companies  were  controlled  by  the  same  owners  as  they  are  today. 
This  Commission  believes  and  wishes  to  establish  as  a  precedent 
that  under  such  circumstances  it  is  especially  to  be  insisted 
upon  that  transactions  between  public  service  corporations 
should  be  very  carefully  reviewed  by  the  regulating  officials. 

The  conclusion  in  this  case  cannot  be  avoided  that  unless 
the  railway  contract  is  made  to  bear  its  proper  amount  of  In 
vestment  Charges  the  result  w^ould  be  a  serious  discrimination 
against  the  general  consumer. 


66 


RErORT. 


TABLE  XXIX 

SEGREGATED  INVESTMENT  RESPONSIBILITY   OF  UNITED  RAILWAYS     LOAD 


(A) 


Ashley   St.    Plant    (depreciated   value) 

Real   Estate •  •  • 

Interest   on   Construction   Expenditures 

Engineering   (5%   on  Cost) 

Taxes  and   Insurance  during  Construction 

Organization  Item  I,  Table  VIII 

Total   Earning  Value   of  Ashley   St.   Plant 

(B) 
Demand  of  United  Railways     Load   on   the   Investment   Peak 

1909—45%.                                               .,               ^       - 
Investment  Responsibility  United  Railways   Load 

(C) 
Total  Earning  Value  of  Company's  Property,  Table  XXVIII. . 
Investment  Responsibility  United  Railways  Load 


Earning  Value  in  Service  of  General  Consumers, 


$4,690,831 

400,000 

508,192 

256,569 

65,548 

63,378 

$5,984,518 


$2,693,033 


$16,134,393 
2,693,033 

$13,441,360 


The  current  bought  from  the  Union  Electric  Light  and 
Power  Companv  by  the  United  Railways  is  drawn  entirely  from 
the  Ashley  Street  Station,  and  its  Investment  Responsibility  can 
be  measured  by  its  percentage  of  demand  upon  the  Investment 
Peak  of  that  station.  For  1909  its  demand  was  45  per  cent,  of 
the  highest  or  Investment  Peak. 

In  Table  XXIX  (A)  shows  the  Earning  Value  of  the  Ashley 
Street  Station,  (B)  shows  the  portion  of  the  Earning  Value  as- 
signable to  the  Railways  Load,  and  (C)  shows  the  Earning 
Value  in  the  service  of  the  public  and  upon  which  the  con- 
sumer should  pay  a  fair  rate  of  return. 

THE  FAIR  RATE  OF  RETURN. 
In  determining  what  is  a  fair  rate  of  return  on  money  in- 
vested in  serving  the  public  in  an  enterprise  such  as  the  one 
under  consideration,  the  Commission  has  taken  as  a  guide  the 
rate  at  which  money  can  be  procured  for  investment  in  such  a 

propertv. 

The  Union  Electric  Light  and  Power  Company  is  now  a 
well  established  enterprise,  has  a  large,  growing  and  profitable 
business  and  is  exceptionally,  well  managed.  It  is  not,  how- 
ever, an  assured  monopoly  and  may  at  any  time  be  called  upon 
to  withstand  the  severe  competition  of  holders  of  rival  fran- 
chises. This  element  of  risk  justly  entitles  the  investor  to  a 
higher  rate  of  return  than  would  be  the  case  were  the  city  able 
and  willing  to  protect  the  Company  as  well  as  to  regulate  its 

charges. 

If  a  municipality  can  effectually  control  the  rates  and  service 


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of  a  public  utility  it  is  evident  that  there  is  no  need  of  compe- 
tition. It  is  also  evident  that  if  the  risk  of  competition  were  re- 
moved the  city  would  be  able  to  demand  that  a  lower  rate  of  re- 
turn on  the  investment  be  paid  by  the  consumers.  However,  in 
this  case  the  city  has  no  power  to  protect  the  investment  from 
competition,  so  that  a  rate  of  return  equivalent  to  that  of  a 
perfectly  safe  investment  can  not  be  considered  adequate. 

In  the  opinion  of  the  Commission,  a  fair  rate  of  return  upon 
the  Earning  Value  of  that  part  of  the  property  of  the  Union 
Electric  Light  and  Power  Company  which  is  in  the  service  of 
the  general  public,  is  eight  per  cent,  and  it  has  used  this  rate 
in  calculating  the  price  which  in  its  judgment  the  consumers 
should  be  called  upon  to  pay  for  the  service  received  from  the 
Company. 

Having  decided  upon  the  fair  rate  of  net  return  or  profit 
which  the  Company  is  entitled  to,  the  next  step  is  to  determine 
the  allowable  gross  income  which  is  the  figure  that  the  rates 
are  to  be  calculated  to  produce. 

The  figure  for  the  allowable  gross  income  is  made  up  of  the 
return  or  profit,  the  gross  operating  expenses  and  the  estimated 
depreciation  charge. 

This  depreciation  charge  is  one  of  the  most  important,  and 
certainly  one  of  the  most  problematical  elements  entering  into 
the  calculations  of  public  service  work,  and  deserves  to  be 
treated  somewhat  at  length. 

DEPRECIATION. 

In  the  operation  for  profit  of  any  enterprise  involving  the 
investment  of  capital  in  physical  property,  provision  must  be 
made  for  preserving  the  efficiency  of  the  plant,  and  for  keeping 
the  original  investment  intact.  The  amounts  out  of  gross  in- 
come set  aside  for  this  purpose  are  called  depreciation  charges, 
and  must  be  provided  for  before  there  can  be  said  to  be  any 
real  profit  for  distribution  among  the  investors  or  for  additions 
to  the  capital. 

Until  very  recent  years,  the  full  importance  and  scope  of  the 
depreciation  account  has  either  been  very  poorly  understood 
by  the  managers  of  public  service  companies,  or  if  understood, 
it  has  been  neglected  under  pressure  of  other  demands  upon  in- 
come, or  for  the  sake  of  making  a  larger  showing  of  earnings 
than  the  truth  would  justify.    To  this  neglect  of  the  deprecia- 


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Report. 


tion  account  is  due  much  of  the  uncertainty  now  existing  as  to 
the  real  value  of  public  utilities  properties. 

We  may  roughly  classify  the  causes  of  depreciation  under 
three  general  heads :  1st,  Wear  and  Tear ;  2d,  Inadequacy ;  3d, 
Obsolescence. 

Wear  and  Tear. 

Under  the  first  head  of  Wear  and  Tear,  which  includes  decay, 
we  have  what  is  generally  supposed  to  be  the  most  important  ele- 
ment of  depreciation.  As  a  matter  of  fact,  it  is  the  least  im- 
portant factor  in  the  problem,  and  it  is  so  obvious  that  it  has 
always  been  fairly  well  understood  and  at  least  partly  taken 
care  of  under  the  head  of  maintenance  and  repairs. 

In  the  electric  lighting  and  power  business,  it  may  occasion- 
ally happen  that  a  piece  of  major  equipment  becomes  so  worn 
that  constant  repair  renders  it  no  longer  economical,  and  it  is 
discarded  for  wear  and  tear  alone.  Such  instances,  however,  are 
rare  (with  the  exception  of  wooden  poles),  for  the  reason  that 
the  two  last  causes  in  our  classification,  i.  e.,  inadequacy  and 
obsolescence,  operate  so  rapidly  that  mere  wear  and  tear  has 
seldom  an  opportunity  to  complete  its  work  of  destruction. 

Inadequacy. 

Inadequacy  as  one  of  the  causes  of  depreciation  may  be  de- 
fined as  a  condition  where  the  original  equipment  or  a  part  of 
it  has  become  unserviceable  or  uneconomical  through  changes 
in  the  demands  upon  it,  while  it  may  remain  perfectly  efficient 
for  the  service  for  which  it  was  originally  installed.  As  an  in- 
stance of  inadequacy  we  may  take  the  example  of  a  pole  line 
where  light  poles  have  been  erected.  Should  the  number  of 
consumers  along  this  line  be  increased  beyond  a  certain  limit, 
the  poles  might  no  longer  be  capable  of  carrying  the  necessary 
wires,  and  although  in  perfectly  good  condition,  they  would 
have  to  be  taken  down  and  replaced  by  heavier  ones.  In  an- 
another  instance,  we  may  take  the  example  of  a  power  plant 
equipped  with  a  number  of  small  generating  units.  As  the  result 
of  increased  business,  it  may  become  necessary  to  add  to  the 
station's  capacity.  On  account  of  lack  of  space  or  for  reasons 
of  operating  economy,  it  might  be  inadvisable  to  add  to  the 
number  of  units,  in  which  case  some  of  the  small  units  would 
have  to  be  discarded  and  replaced  by  larger  units.  In  both  of 
these  instances  we  see  perfectly  good  equipment  forced  out  of 


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service  by  change  in  demands  upon  it,  and  a  consequent  loss 
in  value  of  the  difiFerence  between  the  original  cost  and  what 
it  can  be  sold  for  as  second-hand  or  scrap  material. 

Obsolescence. 

Obsolescence  is  that  factor  of  depreciation  which  arises  from 
a  plant  or  any  part  of  it  falling  behind  the  advance  of  the  best 
and  most  modern  standard  of  equipment. 

A  plant  may  be  maintained  in  a  perfect  state  of  repair  and 
may  be  perfectly  adequate  to  supply  the  demand  upon  it,  ac- 
cording to  the  standard  of  good  service  and  economy  in  exist- 
ence at  the  time  of  its  installation,  but  improvements  in  equip- 
ment are  constantly  taking  place,  enabling  other  plants  to  give 
better  service  for  less  money,  and  the  value  of  the  original  plant 
is  decreasing  by  just  so  much  as  its  equipment  falls  behind  the 
march  of  progress.  As  an  instance  of  obsolescence,  we  may  cite 
the  old  belt-driven  small  capacity  generating  units.  A  plant 
so  equipped  many  years  ago  might,  if  proper  attention  had  been 
given  to  repairs,  still  be  perfectly  fit  to  perform  its  original  ser- 
vice, but  the  introduction  of  large  direct  connected  or  turbine 
units  have  so  raised  the  standard  of  economy  and  service,  that 
such  a  plant  would  not  be  tolerated  today  in  a  public  utility, 
either  by  the  consumers  or  by  the  investor. 

During  the  earlier  history  of  the  electric  lighting  and  power 
business,  obsolescence  was  an  extremely  heavy  factor  in  depreci- 
ation. Radical  changes  were  taking  place  in  the  state  of  the  art 
and  large  portions  of  the  equipment  were  quickly  rendered 
valueless  by  new  inventions  and  discoveries.  Fortunately,  at 
this  time,  the  industry  was  recognized  as  being  in  a  more  or 
less  experimental  stage.  The  investments  were  comparatively 
small,  and  the  service  not  a  public  necessity.  As  time  has  ad- 
vanced, the  radical  changes  in  the  art  have  become  fewer  and 
less  violent  in  their  effects  upon  the  efficiency  and  value  of  the 
equipments,  but  there  is  always  a  steady  change  and  improve- 
ment among  the  innumerable  items  which  go  to  make  up  the 
equipment  of  an  electrical  plant,  and  occasionally  a  change  of  a 
more  or  less  radical  nature  which  brings  charges  for  re-equip- 
ment which  the  best  business  knowledge  and  foresight  cannot 
foretell. 

Recent  years  show  some  decrease  in  obsolescence  as  a  factor 
in  depreciation,  as  compared  with  the  earlier  period,  but  it  is 


70 


Report. 


now,  and  probably  will  remain  an  important  and  most  uncer- 
tain element  to  be  provided  for. 

The  Depreciation  Fund.     ' 

The  determination  of  a  proper  amount  to  be  set  aside  each 
year  for  depreciation  in  an  electric  light  plant  is  a  problem 
very  difficult  of  a  satisfactory  solution. 

Given  a  certain  set  of  conditions,  provisions  can  be  made  for 
wear  and  tear  with  considerable  accuracy,  but  immediately  we 
begin  to  deal  with  the  elements  of  inadequacy  and  obsolescence 
(especially  the  latter)  we  enter  upon  a  field  of  calculation  so 
filled  with  variable  and  unknown  factors,  that  the  assignment 
of  the  proper  charges  to  offset  their  efiPect  becomes  a  problem 
dealing  more  with  probabilities  than  with  known  facts.  In 
short,  fixing  a  proper  yearly  charge  to  provide  for  obsolescence, 
is  really  prophecy ing  as  to  what  inventors  and  manufacturers 
are  going  to  do  in  the  way  of  improvement  of  electrical  equip- 
ment— an  impossible  thing  to  do  with  any  degree  of  accuracy. 
Every  plant  is  different  in  its  make-up,  having  different  por- 
tions of  its  capital  invested  in  long  or  short-lived  property,  con- 
sequently the  life  of  each  class  of  equipment  must  be  estimat- 
ed by  itself,  and  from  these  separate  items  must  be  figured  the 
depreciation  of  the  whole.  Expenditures,  moreover,  do  not  occur 
in  regular  amounts  each  year.  The  largest  items  of  replace- 
ment are  the  results  of  the  depreciation  of  a  number  of  years, 
and  if  charged  to  the  operation  of  the  year  in  which  they  occur, 
would  cause  a  false  showing  of  the  real  state  of  the  business  for 
that  year.  It  becomes  necessary  therefore,  in  dealing  with  the 
depreciation  account  to  estimate  and  set  aside  each  year  a  sum 
toward  a  fund  which  in  the  aggregate  will  provide  for  all  the 
depreciation  charges  as  they  may  occur.  This  process  is  in 
fact,  life  insurance  on  each  item  of  the  pliint.  As  soon  as  a 
boiler  is  installed,  money  must  be  set  aside  in  the  fund  each 
year  to  replace  it  when  its  estimated  life  is  ended.  The  same 
with  an  engine,  generator,  building,  pole,  line  or  any  other 
piece  of  equipment. 

To  illustrate  the  importance  to  the  consumer,  of  a  correctly 
handled  depreciation  account,  let  us  suppose  a  case  as  follows: 

A  public  service  corporation  has  invested  $1,000,000  in  plant 
equipment.  The  proper  yearly  depreciation  charge  on  this 
plant  will  be  assumed  to  be  5  per  cent.  The  enterprise,  we  will 
assume  is  successful  and  shows  earnings  over  operating  ex- 


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71 


penses  of  15  per  cent.  Now  suppose  that  the  directors  neglect 
depreciation  and  declare  dividends,  or  pay  out  in  bond  interest 
the  full  15  per  cent  made  over  operating  expenses;  after  a 
few  years— say  ten,  the  plant  will  be  found  to  have  become  worn, 
inadequate  and  obsolete,  and  there  will  be  no  fund  in  the  pos- 
session of  the  Company  for  re-equipment.  If  the  assumption  of 
the  5  per  cent,  yearly  depreciation  is  correct,  and  the  period  has 
been  ten  years,  it  will  be  found  that  $500,000.00  is  needed  to 
replace  the  property  in  its  original  state  of  efficiency. 

The  Company  then  proceeds  to  issue  new  securities  to  obtain 
this  needed  half  million  dollars.  The  capital  as  shown  on  the 
books,  is  now  $1,500,000,  but  the  real  value  of  the  equipment 
in  the  service  of  the  public  is  only  the  original  $1,000,000. 
Nevethertheless,  the  consumer  is  called  upon  to  pay  rates  which 
will  yield  returns  on  the  full  $1,500,000.  The  investor,  how- 
ever, has  received  one-half  of  his  original  capital  back,  in  the 
way  of  the  5  per  cent,  in  the  dividends,  which  should  have 
gone  to  the  depreciation  fund. 

The  foregoing  illustration  shows  the  very  great  importance 
of  the  city's  having  the  power  to  control  the  depreciation  fund. 
It  is  essential  to  the  interests  of  both  the  Company  and  the  con- 
sumer that  an  ample  fund  be  provided,  but  having  once  paid 
it  in  the  rates,  the  consumer  might  be  deprived  of  its  benefits  by 
the  mishandling  of  the  fund  by  the  Company. 

It  is  evident  that  without  proper  control  of  this  fund  the 
consumer  might  not  only  pay  for  it  once  in  the  rates  but  also 
have  it  capitalized  against  him  in  the  end. 

The  depreciation  fund  should  be  deposited  in  some  bank  or 
trust  company  designated  by  the  City  Comptroller,  and  while  it 
would  be  perfectly  proper  that  portions  of  it  should  be  loaned  to 
the  Company  for  extensions,  it  should  in  all  its  uses  be  under 
the  control  of  officials  whose  duty  it  is  to  safeguard  the  interests 
of  the  consumers.  Unfortunately,  under  the  enabling  act  which 
gives  the  city  the  power  to  fix  reasonable  rates  for  public  service, 
there  is  no  power  given  to  control  the  depreciation  fund.  Until 
such  power  is  conferred  upon  it,  the  city  must  rely  upon  the 
investigating  power  of  the  Commission  to  keep  close  watch  upon 
the  use  of  the  fund.  In  case  of  its  misuse,  such  measures  might 
be  taken  by  the  municipal  assembly  as  may  seem  best.  In  the 
proposed  ordinance  which  is  submitted  with  this  report,  the 
Commission  has  endeavored  to  provide  what  protection  to  the 
depreciation  fund  seems  possible  under  the  existing  laws. 


72 


Report. 


Report. 


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76 


Report. 


Table  XXX  shows  in  detail  a  careful  estimate  of  the  probable 
annual  amount  required  for  a  proper  depreciation  fund  for  the 
property  of  the  Company  as  of  the  date  of  the  inventory. 

The  total  amount,  $552,487,  is  4.39  per  cent,  of  the  estimated 
construction  cost  of  the  plant.  But  as  the  result  of  an  inade- 
quate depreciation  fund  is  disastrous  both  to  the  Company  and 
the  consumer,  and  as  there  will  undoubtedly  be  additions  to  the 
plant  before  a  readjustment  of  the  rates  can  take  place,  it  is  be- 
lieved by  the  Commission  that  a  safe  amount  to  use  in  calculat- 
ing the  rates  should  be  5  per  cent  of  the  construction  cost  or 
$629,337. 

To  arrive  at  the  portion,  of  this  charge  to  be  borne  by  the 
Railways  load  and  the  portion  to  be  borne  by  the  general  con- 
sumer, we  find  by  comparing  items  from  Table  XXX  that  the 
Ashley  Street  Station  is  responsible  for  43  per  cent,  of  the  total 
estimated  Depreciation  Charge.  From  Table  XXIX  we  see 
that  the  Railways  load  is  responsible  for  45  per  cent,  of  the  In- 
vestment Charge  on  that  station.  Combining  these  two  per- 
centages we  find  that  the  Railways  load  is  responsible  for  19.35 
per  cent,  of  the  total  allowed  Depreciation  Charge  of  $629,337, 
or  $121,777.  Deducting  this  there  is  left  an  annual  Depre- 
ciation Charge  of  $507,560  to  be  included  in  the  income  to  be 
derived  from  the  general  consumer. 

INCOME  FROM  GENERAL  CONSUMERS. 

The  income  which  will  bring  a  fair  return  on  the  value  of 
the  property  in  the  service  of  the  general  consumers  is  arrived 
at  as  shown  in  Table  XXXI. 


TABLE  XXXI 


INCOME  FROM  GENERAIi  CONSUMERS 


1.  8%   on   Earning  Value   in   Service   of  General   Consumer, 

see  Table  XXIX 

2.  Depreciation   Charge 

3.  Operating    Expense,    less    cost    of    Generating    Railways 

Load 

4.  Taxes,  less  Proportion  for  Railways  Load 

Total  


$1,075,309 
507,560 

864,423 
193,240 

$2,640,532 


l^ 


N' 


Y 


V 


V 


Vi 


/ 


V 


Report. 


77 


The  total  shown  in  this  Table  gives  the  amount  which  the 
general  consumers  as  a  whole  should  pay  to  the  Company  to 
bring  a  net  return  of  8  per  cent,  on  the  property  in  their  ser- 
vice. But  in  calculating  the  amount  upon  which  the  rates  are 
to  be  based,  the  usual  discount  of  5  per  cent  for  prompt  pay- 
ment should  be  taken  into  consideration.  Making  this  calcula- 
tion we  find  that  the  total  annual  amount  upon  which  the  rates 
for  the  general  consumer  should  be  estimated  to  be  $2,779,507. 

RATES. 

The  investigations  of  the  Commission  have  demonstrated  that 
in  the  aggregate  the  Company  is  not  receiving  an  exorbitant  or 
unreasonable  return  from  the  current  sold  to  the  general  con- 
sumer. In  fact  the  amount  of  revenue  received  frotn  the  gen- 
eral consumer  in  1909  corresponds  very  closely  to  the  amount 
determined  by  the  Commission  as  the  just  and  fair  return  on 
the  Earning  Value  of  the  property  devoted  to  this  service. 

The  Commission  finds,  however,  that  while  the  aggregate 
return  from  the  general  consumer  is  reasonable,  the  rates  as 
at  present  established  are  not  just  as  between  the  consumers 
themselves. 

The  maximum  rate  of  12  cents  as  now  in  use  is,  in  the  opin- 
ion of  the  Commission,  too  high  and  discriminates  against  the 
moderate  sized  consumer,  while  many  of  the  large  consumers 
are  receiving  a  rate  lower  than  can  be  justified.  It  is  not  im- 
plied that  the  Company  has  been  designedly  imposing  an  un- 
just system  of  rates  upon  its  consumers.  The  rates  are  prob- 
ably as  just  as  in  most  large  cities,  but  this  fact  does  not,  as 
argued  by  the  Company,  establish  the  equity  of  the  system  and 
of  the  present  charges.  The  investigation  of  electric  rates  by 
public  officials  for  the  purpose  of  preventing  undue  discrimi- 
nation between  the  consumers,  is  a  comparatively  recent  ques- 
tion, and  heretofore  there  have  been  few  exhaustive  investiga- 
tions for  that  purpose  in  cities  where  the  business  is  comparable 
in  size  or  complexity  to  that  of  St.  Louis. 

The  present  rate  schedule  of  the  Union  Electric  Light  and 
Power  Company  appears  to  the  Commission  to  be  a  codification 
of  the  results  of  the  pressure  of  different  commercial  forces  upon 
the  rates  of  the  past.     There  is  undoubtedly  a  natural  tendency 


78 


Report. 


in  all  large  enterprises  dealing  with  numbers  of  consumers  of 
greatly  varying  sizes,  to  load  up  the  moderate  sized  consumers 
with  a  greater  portion  of  the  charges  than  is  justified  by  the  act- 
ual cost  to  serve  them.  This  natural  commercial. tendency  has 
been  allowed  to  work  with  considerable  effect  upon  the  evolution 
of  the  rates  of  the  Company  and  the  results  are  fully  evident 
to  the  Commission  in  the  present  schedule  and  system. 

The  working  of  this  commercial  tendency  to  load  the  moder- 
ate sized  consumer  may  not  perhaps  be  open  to  criticism  from 
the  commercial  standpoint,  but  a  public  service  corporation  owes 
the  duty  of  not  only  exacting  no  more  than  a  fair  aggregate 
return  but  also  of  maintaining  so  far  as  possible  just  rates  as 
between  its  several  consumers. 

One  of  the  serious  faults  which  the  Commission  finds  with  the 
present  methods  of  the  Company  is  the  system  of  guarantees  in 
the  consumers'  contract.  From  data  worked  out  in  great  detail 
by  the  Commission,  it  appears  that  large  numbers  of  users  of 
electricity  have,  by  reason  of  the  guarantees  in  the  contract,  been 
paying  rates  far  in  excess  of  the  maximum  of  12  cents.  This 
is  partly  due  to  ignorance  of  what  they  are  paying  per  K.  W.  H. 
on  the  part  of  these  consumers,  and  partly  due  to  the  method 
of  adjusting  contracts  on  the  basis  of  Connected  Load.  1%  is 
due,  however,  to  the  present  management  of  the  Company  to  say, 
that  it  has  already  taken  notice  of  such  results  from  its  contracts 
and  is  voluntarily  taking  steps  to  correct  the  evil  to  the  extent 
of  advising  consumers  as  to  the  best  contract  under  its  present 
system  to  fit  the  individual  case. 

In  certain  exceptional  cases,  however,  where  the  Company  is 
required  to  make  extraordinary  investment  solely  on  account 
of  an  individual  consumer,  it  appears  just  to  require  either  a 
guarantee  of  consumption  or  a  lump  sum  payment  sufficient  to 
protect  the  Company  against  loss.  It  has  been  the  aim  of  the 
Commission  to  provide  for  these  exceptions  in  the  accompany- 
ing ordinance,  and  also  in  view  of  the  considerable  readjust- 
ment required  in  the  rates  by  reason  of  abolishing  the  guar- 
antee, to  allow  a  sufficient  time  from  the  passage  of  the  ordi- 
nance in  which  to  make  such  readjustment. 

The  Commission  is  convinced  that  no  palliative  measures  can 
meet  the  conditions  of  this  situation.  It  believes  that,  as  a 
general  rule,  a  guarantee  to  use  a  specific  quantity  of  current 


/. 


V 


Report. 


79 


is  not  only  inconsistent  with  the  character  of  a  public  utility, 
but  that  even  if  the  guarantee  works  to  the  advantage  of  the 
consumer  making  it,  it  is,  on  account  of  the  resulting  discrim- 
inatory price,  to  the  direct  disadvantage  of  those  consumers  not 
able  to  make  a  guarantee. 

Another  serious  fault  with  the  present  rate  schedules,  is  the 
basing  of  charges  and  discounts  on  the  Connected  Load  of  the 
consumer.  By  Connected  Load  is  meant  the  possible  demand 
which  a  customer  might  make  on  the  plant  should  he  turn  on 
at  one  time  all  of  the  lamps,  motors  or  apparatus  which  he  has 
connected  to  the  wires  of  the  Company.  There  are  only  two 
theories  under  which  Connected  Load  can  possibly  become  a  fac- 
tor in  a  consumer's  rates,  both  of  which  the  Commission  believes 
to  be  fallacious.  One  is  that  it  is  a  measure  of  the  consumers' 
Peak  Responsibility,  or  share  in  causing  the  investment.  This 
phase  of  the  question  is  fully  considered  in  Appendix  B.  The 
other  theory,  or  rather  phase  of  the  former  theory,  is  known  as 
the  "ready  to  serve"  theory,  which  assumes  that  the  Company 
must  stand  ready  to  serve  the  consumer  with  a  certain  calcu- 
lated fraction  of  his  Connected  Load,  and  that  therefore  regard- 
less of  whether  the  consumer's  actual  demand  on  the  investment 
is  in  proportion  to  his  Connected  Load  or  not  he  must  pay 
Investment  Charges  in  proportion  to  it.  Upon  analysis,  this 
theory,  as  does  the  first  one,  works  back  to  the  question  of 
taking  Connected  Load  as  a  measure  of  the  cause  of  invest- 
ment, and  in  that  light  is  considered  in  Appendix  B. 

The  investigations  of  the  Commission  show  that  the  use  of 
Connected  Load  as  a  factor  in  rate  making  works  especial  in- 
justice where  applied  to  residence  consumers,  but  that  while  as 
a  factor  it  is  theoretically  incorrect,  actual  conditions  in  the 
power  and  business  light  classes  render  its  use  not  so  harmful 
as  might  be  expected.  In  order  therefore,  to  minimize  as  far 
as  possible  the  confusion  of  a  readjustment  period,  the  Com- 
mission does  not  recommend  that  the  Company  be  required  at 
the  present  time  to  drop  this  factor  from  its  rate  system  as 
applied  to  other  classes  than  residence  consumers. 

Aside  from  the  fact  that  Connected  Load  is  an  unreliable  and 
useless  factor  in  the  calculation  of  rates,  it  is  an  extremely  un- 
desirable element  in  a  consumer's  contract  or  bill.  The  aver- 
age consumer  does  not  understand  Connected  Load,  and  there- 


/ 


'Y 


80 


Repokt. 


Report. 


81 


[   ■  : 


fore  feeling  mystified  and  helpless  in  dealing  with  his  expendi- 
ture, is  prone  to  become  resentful  and  suspicious  whenever  the 
bill  seems  larger  than  in  his  opinion  it  should  be.  If  it  is 
possible  to  make  it  so,  the  consumer  is  entitled  to  a  contract 
or  bill  from  a  public  service  corporation  which  is  simple  and 
direct  and  leaves  him  with  a  clear  understanding  of  his  trans- 
action. 

The  theories  for  rate  making  as  adopted  by  this  Commis- 
sion, are  set  forth  in  Appendix  C.  The  Commission  is 
convinced  of  the  correctness  of  these  theories,  and  they 
are  admitted  to  be  correct  in  principle  by  the  Com- 
pany's experts,  who,  however,  while  endorsing  the  theories, 
doubt  the  existence  at  the  present  time  of  sufficient  data  for 
establishing  a  complete  system  of  rates.  The  Commission 
considers  the  data  at  hand  as  sufficient  to  safely  determine  the 
maximum  rate  which  should  be  allowed  to  be  charged,  and 
this  is  all  it  wishes  to  establish  for  the  present  at  least.  By 
the  establishment  only  of  a  correct  maximum  charge,  discrimi- 
nation against  the  small  and  moderate  user  of  electricity  will 
be  prevented,  and  at  the  same  time  the  Company  will  be  al- 
lowed to  readjust  its  rates  under  the  new  conditions  with  as 
little  interference  as  possible.  The  Commission  doubts  the 
wisdom  of  establishing  by  law  a  minutely  detailed  system  of 
rates  for  electric  light  and  power,  however  full  and  reliable 
the  data  for  calculation  may  be;  the  factors  entering  into  a 
rate  calculation  are  constantly  varying  and  unless  the  law 
leaves  room  for  considerable  flexibility  in  the  adjustment  of  the 
rates  from  time  to  time,  there  is  grave  danger  of  its  becoming 
disadvantageous  both  to  the  consumer  and  to  the  Company. 

The  figure  adopted  by  the  Commission  as  the  just  maximum 
rate  in  the  present  case  is  nine  and  one-half  cents  per  kilowatt 
hour,  and  is  the  calculated  just  rate  for  the  residence  class. 
The  calculations  for  this  class  show  the  just  rate  to  be  the  high- 
est class  rate  in  the  entire  business,  and  by  taking  it  as  the 
maximum,  discrimination  is  prevented  and  correct  charges 
established  for  over  half  of  the  consumers  of  electricity  in  St. 

Louis. 

In  fixing  upon  a  true  rate  the  Commission  is  of  the  opinion- 
that  more  exact  justice  between  the  consumers  might  be  ar- 
rived at  by  assessing  a  flat  customers'  charge  (see  Appendices 


V 


B  and  C)  per  month  to  each  consumer,  and  making  a  cor- 
responding reduction  in  the  K.  W.  H.  charge,  but  this  method, 
while  correct  in  principle,  has  proven  so  extremely  unpopular 
wherever  tried,  that  it  has  been  thought  best  to  absorb  the  cus- 
tomers' charge  in  the  rate. 

As  the  calculation  of  the  maximum  rate  takes  into  account 
the  full  amount  of  the  customers'  charge,  the  present  custom 
of  requiring  a  minimum  bill  of  one  dollar  per  month  should 
not  be  allowed  to  continue  where  the  consumer  pays  the  max- 
imum rate,  but  in  order  to  protect  the  consumer  and  the  Com- 
pany against  the  possible  addition  of  large  numbers  of  cus- 
tomers who  might  require  connection  simply  for  occasional  use 
paying  the  maximum  rate.  In  all  other  cases  a  minimum  bill 
of  fifty  cents  per  month  should  be  required  of  the  consumers 
of  the'  ^>urrent,  the  Commission  believes  that  a  minimum  bill 
of  one  dollar  is  considered  just. 

As  the  result  of  its  investigation,  the  Commission  submits  a 
draft  of  ordinance  in  which  are  embodied  its  conclusions  and 
recommendations. 

Respectfully  submitted, 

Joseph  L.  Hornsby,  Chairman, 
James  A.  Waterworth, 
James  E.  Allison,  Chief  Engineer, 

COMMISSIONERS. 


V 


EXHIBIT  1  l-A 


UNION  ELECTRIC  LIGHT  &  POWER  CO, 

CHART  OF  OOMPANIE8  WHICH  PRECEDED  THE  UNION  COMPANY  PROPER, 
ON  THE  ONE  HAND,  OR  THE  MISSOURI  EDISON  CO.,     ON  THE  OTHER,  UP 
TO  THE  TIME  OF  THE  MERCER  IN  SEPTEMBER-1003. 


BRUSH  ELECTRIC  ASSN 
Inc.  1881 
Capital  Stock  $250,000 


ST.  LOUIS  ILLUMINATING  CO. 
Inc.  1885 
Capital  Stock  $100,000    


LACLEDE  POWER  CO. 

Inc.  1891 
Capital  Stock  11.000.000 

EDISON 
ILLUMINATING  CO 
OF  CARONDELKl' 

Inc.  1895 

• 

#■ 

f 

> 

MISSOURI  ELEC.  LIGHT 

&  POWER  CO. 

Inc.  1888 

CapiUl  Stock  $600,000 

1889.-l8tMt8:e.  Bonds  ,$540,000 

1891.-2nd       "       "        $600,000 


CITIZENS  ELEC.  LIGHTING 

&  POWER  CO. 

Inc.  1891 

Original  Cap.  Stock,  $750,000 

1898,  Increased  to    $2.000  JXK) 


IMPERIAL  ELECTRIC  LIGHT, 

HEAT  A  POWER  CO.  No.  1 

Inc.  1896 

Capital  Stock  52.000 
1897.  Increased  to  $20O.W)O 


CONSOUDATEDELEC.  CO, 

Inc.  18!)9 

Cap.  Stock  $10,000 


r 


CITY  LIGHTING  CO 

Inc.  1900 

Cap.  Stock  $600,000 

Bonds  $600.000 


Feb. 


1902 


IMPERIAL  ELECTRIC  LIGHT, 
HEAT  &  POWER  CO. 
Inc.  1899       No.  2 
Cap.  Stock  $l.r)00.000 

1900.  Bonds  IsBued  $1,000.000 


May-1902 


EXCELSIOR  ELEC.  CO. 

Inc.  1885 

Capital  Stock  $13,000 


ST.  LOUIS  WESTERN 
ELECTRIC  UG«T  CO 
Inc.  1887 
Capital  Stock  $60,000 


a> 

CO 


1888 


METROPOLITAN  ELEC.  CO. 

Inc.  1888 

Capital  Stock  $100.000 


1888 


lt88 


1888 


I 


UNITED  ELECTRIC  CO. 
Inc.  1883  as  St.  Louis  Thompson-  Houston  Elec 
Light  Co. 

1884,  Changed  to  St.  Louis  Thompson  Elec.  Co, 
1889.  Changed  to  United  Elec.  Co. 
Original  Cap.  Stock.  $25,000 
Increased  from  time  to  time  to  $500.000 


I 


T 


ST.  LOUIS  ELEC. 
LIGHT  &  POWER  CO. 
Inc.  1888 
Capital  Stock     $8,000 
1896  Increased  to  $450,000 


ST.  LOUIS  ILLUMINATING  CO. 

(Enlarged) 
1889,  Cap.  Stock  increased  to  $500,000 
1883,  Bonds  issued  $500,000 


1890 


MUNICIPAL  ELEC.  UGHT  &  POWER  CO. 
Inc.  1889 
Original  Cap.  Stock  $750,000 
Original  Bonds         $750,000 
Feb.  1, 1890,  Cap.  Stock  Increased  to  $1,500,000 
Feb.  1, 1890,         Bonds  Increased  to  $l,500,0f^ 


a. 

00 


1893 


EDISON  ILI.UMINATING  CO.  OF  ST.  LOUIS 
Inc.  1892 

Original  Cap.  Stock,  $5,000 

1893  Increased  to  $3,500,000 

And  there  af  t^r  to  $4,000,000 

1893  Bonds  authorized,  $3,000,000 

Increased  to  $4,000,000    


1897 


I 


MISSOURI  EDISON  ELEC.  CO. 

Inc.  1897 

Capital  Stock  $4,000,000 

Bonds,  $4,000,000 

X 


UNION  ELEC.  LIGHT  &  POWER  CO. 
Inc.  1902       No.  1 
Capital  Stock  $10,000,000 

Bonds  $10,000,000 


1903 


ELEC.  LIGHT,  POWER 
&  CONDUIT  CO. 
Inc.  1896 
Capital  Stock  $50,000 


1898 


1907 


UNION  ELECTRIC  LIGHT  &  POWER  CO.  NO.  2. 

Inc.  Sept.  1903 
Capital  Stock,  $10,000,000 

Capital  Stock,  Increased  Dec,  1907  to  $18,000,000 

Bonds  of  Union  No.  1  $10,000, 000 


P-80NO.  TI4B 


V, 


I 


H 

y 


Y 


> 


V 


APPENDIX   A 


HISTORY  OF  THE  COMPANIES 


PRECEDING 


The  Union  Electric  Light  & 
Power  Co.  No.  2 


REPORT  TO 


The  Union  Electric  Light  &  Power  Co. 


BY 

Price,  Waterhouse  &  Co., 

Chartered  Accountanta 


•; 


Appendix    A 


PART  I. 

UNION  ELECTRIC  LIGHT  &  POWER  CO. 

SYNOPSIS  OF  HISTORY  OF  THE  UNION  COMPANY 
NO.  1  GROUP  OF  COMPANIES. 

IMPERIAL  ELECTRIC  LIGHT,  HEAT  AND  POWER 

COMPANY  NO.  1  AND  NO.  2 ;  CONSOLIDATED 

ELECTRIC  COMPANY. 

The  first  Company  of  this  name  was  organized  on  December 
3,  1896,  with  a  capital  stock  of  $2,000.00  and  for  the  usual 
term  of  fifty  years.  At  the  first  meeting  of  the  directors  held 
on  December  3,  1896,  the  President  w^as  directed  to  file  the 
acceptance  by  the  Company  of  the  terms  of  the  then  recently 
adopted  City  Ordinance  No.  18680,  which  would  perhaps  indi- 
cate that  the  Company  was  brought  into  existence  by  the  pas- 
sage of  this  Ordinance.  This  was  the  so-called  '^Keyes"  Ordi- 
nance authorizing  the  construction  and  operation  of  under- 
ground conduits  for  electrical  conductors  within  a  certain  dis- 
trict which  practically  coincided  with  the  downtown  or  business 
portion  of  the  city. 

At  a  meeting  on  June  8,  1897,  the  directors  approved  the 
lease  for  ninety-nine  years  from  Daniel  Catlin  and  wife  of  the 
ground  at  the  southeast  corner  of  Tenth  and  St.  Charles  St.  on 
which  was  erected  and  now  stands  the  plant  of  the  Imperial 
Company. 

In  July,  1897,  the  capital  stock  was  increased  to  $200,000.00. 

The  construction  of  the  plant  does  not  appear  to  have  been 
actively  pushed  until  some  time  in  1898  or  1899.  About  that 
time  a  syndicate  secured  an  option  on  the  stock  from  the 
former  owners,  and  on  December  16,  1899,  the  Consolidated 
Electric  Company  was  organized,  with  a  capital  stock  of 
$10,000.00,  which  issued  its  temporary  certificates  for  notes  ag- 
gregating $1,000,000.00  for  the' purchase  of  the  property  and 
assets  of  the  Imperial  Company.     On  receipt  by  the  Imperial 


1 


( 


K 


4 


AppendixA  3 

Company  of  the  aforesaid  notes,  they  were,  by  resolution  of  the 
directors,  on  December  23,  1899,  distributed  as  to  approximately 
$400,000.00  to  the  syndicate  to  reimburse  them  for  their 
assumption  and  payment  of  the  indebtedness  of  the  Company 
and  as  to  the  balance  of  $600,000.00  to  the  stockholders. 

Thereupon  a  formal  agreement  of  consolidation  was  entered 
into  between  the  two  companies,  providing  for  the  merger  of  the 
Imperial  Company  (the  old  Company)  and  the  Consolidated 
Electric  Company  as  the  Imperial  Electric  Light,  Heat  and 
Power  Company  (the  new  Company  or  Imperial  No.  2).  The 
agreement  provided  that  all  indebtedness  of  the  two  corpor- 
ations or  either  of  them  was  to  be  assumed  and  paid  by  the 
consolidated  Imperial  Company  after  the  consolidation,  and 
that  the  temporary  certificates  for  the  notes  issued  by  the  Con- 
solidated Electric  Company,  amounting  to  $1,000,000.00,  were 
to  be  assumed  by  the  Consolidated  Imperial  Company,  and  notes 
or  mortgage  bonds  were  to  be  issued  therefor  and  the  temporary 
receipts  called  in  and  cancelled. 

The  Imperial  Electric  Light,  Heat  and  Power  Company  (the 
new  Company)  was  formed  on  January  3,  1900,  with  a  capital 
stock  of  $1,500,000.00  and  at  a  special  meeting  of  stock- 
holders held  March  10,  1900,  an  issue  of  $1,500,000.00  5% 
mortgage  bonds  was  duly  authorized,  of  which  $1,000,000.00 
were  issued  in  accordance  with  that  authority. 

The  bonds  thus  issued  were  used  to  take  up  the  notes  of  the 
consolidated  Company,  and  the  syndicate  accounts  show  that 
the  bonds  were  subscribed  at  95  and  the  proceeds  applied  by 
the  Syndicate  to  the  following  purposes : 

Purchase  of  stock  of  old  Company $400,000.00 

E.  J.  Bruckman  Option 100,000.00 

Indebtedness,  interest,  etc. 267,549.41 

Purchase  of  stock  of  Consolidated  Electric  Com- 
pany       10,000.00 

Paid  over  to  Imperial  Electric  Light,  Heat  &  Power 
Company  (the  new  Company)  to  reimburse  the 

Company  for  construction   expenditures 149,713.19 

Sundry  expenses  (less  interest  on  deposits) 22,737.40 

Total $950,000.00 


4  AppendixA 

The  books  of  the  new  company  were  thereupon  opened  up 
on  the  basis  of  carrying  forward  thereto  the  book  balances  of 
the  property  and  asset  accounts  of  the  old  Company  of  an 
aggregate  value  of  $672,887.04,  to  which  there  was  then  added 
the  further  amount  of  $327,112.96  required  to  offset  the 
$1,000,000.00  of  bonds  issued.  At  the  same  time,  the  $1,500,- 
000.00  of  capital  stock  issued  was  debited  per  contra  to  Fran- 
chises, Licenses,  etc.  The  amount  of  $327,112.96  was  first 
charged  to  a  general  plant  account  and  was  then  transferred 
(along  with  certain  liabilities  of  $9,240.52  disclosed  subse- 
quently) to — 

Discount  on  bonds $     50,000.00 

Good-will  Account 286,353.48 


$336,353.48 
The  Good-will  item  being  made  up  as  follows : 

Premium  paid  by  the  Syndicate  on  the  purchase 

of  the  shares  of  the  old  Company $200,000.00 

Paid  for  Bruckman  Option 100,000.00 

Paid  for  Consolidated  Electric  Stock 10,000.00 

Expenses   22,737.40 

Sundry  Liabilities 9,240.52 

$341,977.92 
Less : — 

Book  Surplus $47,401.10 

Sundry  Credits 8,223.34     $  55,624.44 

Good-will  as  above $286,353.48 


At  a  meeting  of  directors  on  May  7,  1900,  it  was  decided  to 
enter  into  an  agreement  for  securing  control  of  the  city  light- 
ing contract  between  the  City  of  St.  Louis  and  the  Seckner 
Contracting  Company.  This  was  effected  by  a  certain  four- 
party  agreement  of  the  same  date  between  (1)  the  Imperial 
Light  Company,  (2)  the  Seckner  Contracting  Company,  (3) 
the  City  Lighting  Company  and  (4)  John  G.  Brown  and 
George  Mayer  (who  owned  or  controlled  the  capital  stocks  of 
the  Seckner  and  the  City  Lighting  Companies),  the  substance 


I 


y 

K 


AppendixA  5 

of  which  was  that  in  consideration  of  Brown  and  Mayer  caus- 
ing the  capital  stocks  of  the  Seckner  and  the  City  Companies 
to  be  transferred  to  nominees  of  the  Imperial  Company,  the 
latter  company  undertook  to  see  that  the  t^rms  of  the  Lighting 
contract  were  properly  carried  out  and  that  the  revenues  there- 
from were  applied  to  the  payment  of  the  bonds  of  the  City 
Company  as  required  in  the  agreement  under  which  the  bonds 
were  issued.  The  Imperial  Company  further  agreed  to  indem- 
nify Brown  and  Mayer  on  account  of  a  counter-bond  furnished 
to  the  National  Surety  Company  against  its  bond  running  to 
the  City  of  St.  Louis.  In  short.  Brown  and  Mayer  being  de- 
sirous of  withdrawing  from  under  the  responsibilities  of  the 
contract  with  the  city,  the  Imperial  Company  offered  to  take 
their  place. 

At  a  meeting  of  Directors  held  on  February  13,  1902,  it  was 
voted  to  take  over  the  assets  of  the  City  Lighting  Company. 

At  a  meeting  of  the  stockholders  on  May  16,  1902,  the  con- 
solidation with  the  Citizens  Electric  Lighting  and  Power  Com- 
pany was  approved. 

It  may  be  as  well  to  here  explain  that  the  accounts  of  the 
Imperial,  City  and  Citizens  Companies  were  not,  however,  com- 
bined at  the  exact  date  of  the  respective  consolidations  and  that 
it  was  not  until  December  31,  1902,  that  they  were  all  brought 
together  on  the  books  of  the  Union  Electric  Light  &  Power 
Company  or  Union  No.  1.  Trial  balance  sheets  of  the  three 
companies  as  of  December  31,  1902,  are  hereto  annexed.  (See 
Exhibits  II-C  and  II-H) .  The  then  position  of  the  Imperial 
Company  therein  may  be  summarized  thus : 

Capital  Stock  issued  for  Franchises  $1,500,000.00 

Licenses  and  contracts 1,000,000.00 

Bonds : — 

Surplus  to  December  31,  1901.  .$114,383.52 
Profits — January  1  to  May  20, 

1902    49,155.67 

Profits — May  20  to  December  31, 

1902    92,464.50 

256,003.69 
Advanced  by  Union  Company  Con- 
struction Department 73,776.38 


f) 


r 


6 


Appendix  A 


Expended  or  otherwise  accounted 
for  thus: — 

Construction $676,030.53 

Betterments    ■ 85,618.58 

$761,649.11 

Discount  on  Bonds 50,000.00 

Development,  etc 37,860.08 

Good-will 286,353.48 

Due  from  Seckner  Co 11,890.39 

Due  from  City  Lighting  Com- 
pany (or  Seckner  Co.) 60,776.52 

Net  Current  Assets 121,250.49 

Franchises,  Licenses,  etc 1,500,000.00 


$2,829,780.07     $2,829,780.07 

SECKNER  CONTRACTING  COMPANY. 

The  Seckner  Company  was  originally  organized  in  March, 
1893,  under  the  laws  of  Illinois  for  the  purpose  of  carrying 
on  a  general  contracting  business,  the  capital  stock  being  $10,- 
000.00.     The  capital  stock  was  increased  to  $25,000.00  in  1898. 

In  1900  John  G.  Brown  and  George  Mayer,  being  then  the 
principal  stockholders  of  the  Company,  the  Company  tendered 
for  and  was  successful  in  securing  the  City  Lighting  contract 
from  the  City  of  St.  Louis  for  a  term  of  ten  years,  from  Sep- 
tember 1,  1900,  and  the  purposes  for  which  the  Company  was 
formed  were  thereupon  enlarged  to  enable  it 

*'to  construct,  keep,  purchase,  lease  or  acquire  waterworks, 
gas  or  electrical  systems  and  operate  the  same,  and  to 
make  contracts  with  municipalities  and  individuals  for 
water,  light,  heat  and  power,  etc.,  etc." 

The  Company  having  no  lighting  plant  of  its  own,  and 
being  desirous  of  co^istructing  one  and  of  issuing  bonds  for  the 
purpose  of  providing  for  such  construction  was,  as  an  Illinois 
corporation,  not  in  a  position  to  issue  bonds  which  would  be 
valid  as  against  the  local  creditors,  and  the  City  Lighting  Com- 
pany w^as  formed  to  construct  the  plant  or  finance  the  construc- 


I 


> 


AppendixA  7 

tion  thereof.  An  agreement  was  entered  into  between  the  two 
Companies,  under  date  of  April  6,  1900,  by  the  terms  of  which 
the  City  Lighting  Company  agreed  to  deliver  at  its  plant  con- 
tinuously throughout  the  period  from  September  1,  1900,  to 
September  1,  1910,  all  electrical  current  needed  by  the  Seckner 
Company  to  perform  its  contract  with  the  City  and  to  supply 
commercial  and  domestic  light  and  power — the  Seckner  Com- 
pany to  pay  therefor  the  minimum  price  of  $3,000.00  per 
month;  but  in  the  event  that  more  than  300,000  K.  W.  H. 
were  furnished,  the  price  was  to  be  l%c  per  K.  W.  H.  for  the 
excess  over  300,000  K.  W.  H.  The  City  Lighting  Company 
was  to  advance  as  needed,  not  exceeding  in  the  aggregate  $400,- 
000.00  on  engineers'  certificates  showing  the  value  of  work 
done  and  only  to  the  extent  of  85%  of  such  value,  which  ad- 
vances were  to  be  repaid  at  the  rate  of  $40,000.00  per  annum. 
The  Seckner  Company  transferred  250  shares  of  its  capital 
stock  as  collateral  to  the  agreement.  At  this  stage  and  about 
the  time  the  Imperial  Company  arranged  to  take  over  the  con- 
tract, it  was  resolved  to  turn  over  to  Brown  and  Mayer  all  the 
assets,  property  and  good-will  of  the  corporation,  excepting  the 
right  and  benefit  of  the  corporation  in  the  contract  with  the  City 
of  St.  Louis,  dated,  March  23,  1900,  or  under  the  ordinance  au- 
thorizing, the  said  contract,  or  under  the  contract  with  the  City 
Lighting  Company,  dated  April  6,  1900 — the  consideration  for 
the  transfer  to  Brown  and  Mayer  being  their  agreement  to  fully 
indemnify  the  Company  on  account  of  all  liabilities  of  the 
Company  incurred  under  or  arising  out  of  any  transaction 
prior  to  the  date  upon  which  the  nominees  of  the  Imperial 
Company  assumed  the  management  of  the  Company.  The 
effect  of  this  transaction  w^as  to  leave  the  Company  with  the 
sole  asset  of  the  contract  on  the  one  side  and  its  capital  stock 
of  $25,000.00  as  its  only  liability  on  the  other,  and  the  present 
books  were  opened  on  this  basis,  no  mention  being  made  therein 
of  the  assets  or  liabilities  turned  over  to  Brown  and  Mayer  in 
which  the  new  owners  had,  of  course,  no  interest. 

In  May,  1900,  and  in  accordance  with  appropriate  resolu- 
tions of  both  Companies,  a  further  agreement  was  executed 
between  the  Seckner  and  the  City  Companies  to  the  effect  that 
(the  agreement  of  April  6,  1900,  not  having  contemplated  the 
building  of  a  sufficient  plant  for  the  full  development  of  com- 
mercial light  and  power)  the  Seckner  Company  agreed  to  pay 


r 


8 


Appendix   A 


Appendix   A 


9 


the  City  Company  85%  of  all  the  gross  receipts  from  its  com- 
mercial business  in  St.  Louis,  while  the  City  Company  was  to 
furnish  the  necessary  current;  and  the  Seckner  Company  fur- 
ther agreed  to  build  a  plant  in  accordance  with  specifications 
attached  to  the  contract,  while  the  City  Company  was  to  cause 
to  be  delivered  to  the  order  of  the  Seckner  Company  all  the 
capital  stock  of  the  City  Company  and  to  pay  the  Seckner  Com- 
pany the  further  sum  of  $100,000.00  in  cash. 

The  stock  was  delivered  in  accordance  with  this  agreement 
and  was  thereupon  distributed  by  the  Seckner  Company  to  its 
stockholders  (the  Imperial  Company  or  its  nominees)  which 
thus  came  into  possession  of  the  capital  stock  of  both  com- 
panies. 

The  $100,000.00  in  cash  was  paid  over  to  the  Seckner  Com- 
pany, as  above  provided,  and  other  funds  were  advanced  from 
time  to  time,  which  were,  however,  repaid  by  the  Seckner  Com- 
pany. It  would  appear,  however,  that  the  advances  under 
both  contracts  never  amounted  to  the  $400,000.00  provided  to 
be  advanced  under  the  original  contract  of  April  6,  1900.  In- 
stead, each  Company  would  seem  to  have  advanced  the  funds 
required  for  central  station  equipment,  or  overhead  or  under- 
ground lines  as  the  occasion  arose.  It  later  appearing  to  be 
to  the  mutual  interest  of  each  Company  to  quit  claim  to  the 
other,  all  right,  title  and  interest  to  the  properties  respectively 
belonging  to  their  respective  systems,  transfers  were  made  and 
the  books  adjusted  on  the  basis  that  the  one  Company,  the  City 
Lighting  Company,  acquired  ownership  of  the  central  station 
equipment,  and  the  other,  the  Seckner  Company,  the  distribu- 
tion system,  in  accordance  with  what  we  understand  was  the 
OT-iginal  intention. 

The  result  was  that  the  Seckner  Company  was  left  in  the 
iinancial  position  indicated  in  the  Trial  Balance  sheet  of  Decem- 
ber 31,  1902  (Exhibit  II-F),  the  figures  whereof  may  be  sum- 
marized thus: 

Advanced  by  the  City  Lighting  Co $221,561.78 

Advanced  by  the  Imperial  Company 11,890.39 

Profits    88,037.59 

$321,489.76 


y 

K 


> 


1/ 


Which  was  invested  in  plant,  or  is  otherwise  accounted  for 
thus: 

Plant   $276,965.57 

Organization    848.49 

Development 17,518.54 

$295,332.60 
Current   Assets    (net) 26,157.16 


$321,489.76 

Since  then,  the  accounts  of  the  Seckner  Company  have  been 
kept  on  the  basis  of  charging  the  City  of  St.  Louis  for  current 
supplied  under  the  contract,  and  of  crediting  the  Union  Com- 
pany with  the  full  amount  so  charged  to  the  city  as  represent- 
ing the  cost  of  the  current  to  the  Union  Company;  in  other 
words,  the  Seckner  Company  continues  in  its  corporate  capacity 
to  supply  the  current  to  the  city  but  purchases  the  current  from 
the  Union  Company  and  turns  over  the  amount  collected  to  the 
Union  Company  in  payment  for  the  purchase.  This  will  ex- 
plain why  the  Trial  Balance  sheet  as  of  December  31,  1908, 
is  practically  identical  with  the  corresponding  statement  at 
December  31,  1902. 

CITY  LIGHTING  COMPANY. 

This  Company  was  incorporated  on  April  5,  1900,  with  the 
object  of  building,  or  providing  by  means  of  a  bond  issue  the 
necessary  funds  for  building  a  plant  and  supplying  current 
to  the  Seckner  Contracting  Company.  The  capital  stock  was 
placed  at  $600,000.00,  which  was  issued  to  the  incorporators, 
who  were  the  stockholders  of  the  Seckner  Company.  This  was 
charged  per  contra  to  Franchises,  Licenses,  etc.,  making  with 
the  $25,000.00  of  capital  stock  of  the  Seckner  Company,  simi- 
larly charged  in  the  books  of  that  Company,  a  total  nominal 
value  of  $625,000.00  placed  on  the  contract  in  the  books  of 
the  two  Companies.  The  two  Companies  were,  of  course, 
practically  one  and  the  same;  the  reason  for  forming  the  sep- 
arate Lighting  Company  being  merely  a  legal  one,  and  in  order 
to  meet  the  objection  which  arose  to  the  issue  of  bonds  by  the 
Seckner  Company  as  a  foreign  corporation. 


10 


Appendix   A 


Appendix   A 


11 


In  pursuance  of  the  plan  of  organization,  the  City  Lighting 
Company  issued  its  5%  bonds  and  executed  a  deed  of  trust  to 
the  Northern  Trust  Company,  Trustee,  of  Chicago,  to  secure 
the  payment  of  the  bonds.     As  further  security  an  assignment 
was  made  to  the  Trustee  of  the  contract  with  the  Seckner  Com- 
pany, dated  April  6,  1900,  to  which  reference  has  already  been 
made  and  the  capital  stock  of  the  Seckner  Company  was  also 
pledged  as  further  security.     The  bonds  were  purchased  by  one 
T.  B.  Potter,  in  Chicago,  at  a  price  of  721/2,  producing  $435,- 
000.00.     In  the  contract  between  T.  B.  Potter  and  John  H 
Brown  and  George  Mayer,  relating  to  the  sale  of  these  bonds* 
and  dated  May  17,  1900,  was  a  stipulation  to  the  effect  that 
out  of  the  difference  between  721/2,  the  cash  paid  by  Potter, 
and  9o,  the  estimated  price  of  the  bonds  to  the  City  Lighting 
Company,  he  was  to  settle  with  Brown  and  Mayer  for  all  their 
claims  against  the  Seckner  Company  and  the  City  Lighting 
Company  released  by  them,  and  he  was  also  to  pay  or  provide 
for  any  claims  against  the  Seckner  Company  or  City  Lighting 
Company,  or  their  assets  or  respective  stocks  (other  than  the 
issue  of  bonds,  the  contract  of  April  6,  1900  and  a  certain  con- 
tract for  the  purchase  of  Heine  boilers) ,  which  might  be  dis- 
covered prior  to  the  final  settlement  between  Potter  and  the 
City  Lighting  Company,  providing  said  claims    arose    from 
transactions  prior  to  the  date  of  the  contract.     In  conformity 
with  this  agreement,  entries  were  made  in  the  books  charging 
$30,000.00  to  discount  on  bonds  and  $135,000.00  to  an  account 
entitled  ^Turchase  of  Interest  in  City  Lighting  Contract.'^  How 
much  of  the  latter  amount  was  paid  in  discharge  of  liabilities 
incurred  by  Brown  and  Mayer  for  the  benefit  of  the  City  Light- 
ing Company,  does  not  appear  from  the  records. 

In  our  remarks  on  the  Seckner  Company,  reference  has 
already  been  made  to  the  second  contract  between  the  City 
Lighting  Company  and  the  Seckner  Company  in  May,  1900. 
At  a  meeting  of  the  stockholders  held  February  14,  1902,  the 
transfer  of  the  plant  and  properties  of  the  Company  to'  the 
Imperial  Electric  Light,  Heat  and  Power  Company  was  ap- 
proved, subject  to  the  Mortgage  and  Deed  of  Trust  of  April 
6,  1900,  to  the  Northern  Trust  Company,  Trustee. 

A  Trial  Balance  sheet  setting  forth  the  position  of  the  Com- 
pany at  December  31,  1902,  at  which  date  the  transfer  of  the 


\ 


V 
V 


/ 


accounts  was  effected,  will  be  found  in  Exhibit  II-C.     The  fol- 
lowing is  a  summary  of  the  figures  therein: 

Bonds  Issued $600,000.00 

Less — Installment  repaid 48,000.00 

$552,000.00 
Advanced  by  Imperial  Company 60,776.52 

$612,776.52 


Which  was  expended  or  is  otherwise  accounted  for  thus : 

Advanced  Seckner  Company $221,561.78 

Expended  on  Plant 133,551.39 

Development 8,409.99 

Interest  in  City  Lighting  Contract 135,000.00 

Discount  on  Bonds 27,600.00 

Deficit— February  14,  1902 30,039.25 

Deficit^February  14  to  December  31,  1902 20,646.76 

Sundry  Assets  (net) 35,967.35 

$612,776.52 

CITIZENS  ELECTRIC  LIGHTING  AND  POWER 

COMPANY. 

This  Company  was  originally  formed  in  1891,  by  Charles 
Sutter  and  associates,  wdth  a  capital  stock  of  $750,000.00,  of 
which  $740,000.00  was  issued  to  Sutter  in  consideration  of  the 
transfer  by  him  to  the  Company,  of  certain  contracts  he  had 
entered  into,  together  with  licenses  for  the  use  of  electrical 
apparatus,  the  balance  of  $10,000.00  of  stock  being  issued  to 
his  associates  in  payment  for  their  services  m  the  organization 
of  the  Company.  Though  formed  in  1891,  the  Company  re- 
mained inactive  until  1897-1898,  when  the  capital  stock  was 
increased  to  $2,000,000.00  The  increase  was  authorized  at  a 
special  stockholders'  meeting  on  January  28,  1898,  and  an  issue 
of  $2,000,000.00  of  bonds  was  authorized  at  the  same  time. 

Under  date  of  November  14,  1897,  a  proposition  was  sub- 
mitted by  Philip  Stock,  in  which  he  undertook  to  construct 
and  complete  the  conduit  or  subway  system  of  the  Company  and 
to  secure  the  right  to  string  the  Citizen  Company's  wires  for 
electric  lighting  and  power  purposes  on  the  poles  of  the  Kinloch 


r 


12 


API'EJ^DIX     A 


Telephone  Company,  in  consideration  of  the  issue  to  him  of 
$950,000.00  of  the  capital  stock  of  the  Citizens  Company,  and 
$525,000.00  of  the  proposed  issue  of  $2,000,000.00  bonds.  This 
work  was  carried  out  by  Philip  Stock  and  a  contract  was 
secured  from  the  Kinloch  Telephone  Company  in  accordance 
with  his  proposal,  and  there  was  accordingly  issued  to  him  the 
$950,000.00  of  capital  stock  to  which  he  was  entitled,  and 
though  it  was  voted  that  the  bonds  of  $525,000.00  should  also 
be  issued  to  him,  this  was  not  done  so  far  as  we  are  aware,  and 
in  fact  it  does  not  appear  from  the  books  that  the  Company 
ever  issued  any  bonds  at  all. 

The  balance  of  the  capital  stock  ($300,000.00)  was  disposed 
of  for  the  following  purposes,  namely: 

$100,000.00  was  sold  for  cash  to  provide  funds  for 
the  purchase  of  a  site  for  the  power  plant,  being 
the  site  of  the  present  Ashley  Street  plant  and 
the  site  formerly  occupied  by  the  St.  Louis  Ele- 
vator Company $100,000.00 

•$147,540.00  was  issued  for  the  purchase  of  the 
site  in  addition  to  the  cash  paid  of  $100,000.00 
as  above  stated 147,540.00 

$247,540.00 
■$52,460.00  was  paid  to  Philip  Stock  to  reimburse 
him  for  amount  theretofore  paid  by  him  on 
behalf  of  the  Company  in  respect  of — 

Interest    $21,894.07 

Taxes  and  Other  Expenses 30,565.93         52,460.00 


$300,000.00 

As  to  the  expenditures  paid  out  of  the  stock  of  $950,000.00 
issued  to  Philip  Stock  or  out  of  the  proceeds  thereof,  particulars 
of  these  expenditures  were  not  passed  through  the  books  of 
the  Company,  and  it  has  not  been  practicable  to  obtain  any 
definite  information  from  this  source.  It  was,  however,  brought 
out  in  the  testimony  in  the  suit  brought  by  Morgan  Jones  and 
other  stockholders  who  did  not  assent  to  the  merger  of  Sep- 
tember 11,  1903,  that  $320,000.00  of  stock  was  turned  over 
to  the  Kinloch  Telephone  Company  for  the  license  or  right  to 
string  wires  on  the  poles  of  that  Company,  and  that  a  further 
amount  of  $200,000.00  in  addition  was  expended  in  the  con- 


< 


y 


\,' 


Appendix   A  13 

struction  of  conduits,  and  we  have  accepted  these  figures  for 
the  purpose  of  the  present  report.  The  total  property  expendi- 
tures of  the  Citizens  Company  may,  therefore,  be  summarized 
thus: 

Cost  of  Real  Estate  purchased  as  a  site  for  the  Ashley  Street 
Plant : 

Paid  in  Cash $100,000.00 

Paid  in  Stock 147,540.00 

$247,540.00 
Stock  issued  in  payment  of — 

Interest $21,894.07 

Expenses    30,565.93        52,460.00 

Expended  for  Conduits   200,000.00 

Expended  for  Kinloch  Pole  Con- 
tract         320,000.00       $820,000.00 

Leaving  for  Franchises,  Licenses, 
etc. — 

Stock  issued  to  the  original  in- 
corporators      750,000.00 

Balance  of  stock  issued  to  Philip 

Stock  or  Citizens  syndicate. ...  430,000.00     $1,180,000.00 


$2,000,000.00 


At  a  special  meeting  of  the  stockholders  held  on  May  16, 
1902,  it  was  resolved  to  consolidate  with  the  Imperial  Electric 
Light,  Heat  &  Power  Company,  the  name  of  the  consolidated 
corporation  to  be  the  Union  Electric  Light  &  Power  Company. 

Trial  Balance  sheet  of  the  Citizens  Company  is  hereto  ap- 
pended (Exhibit  II-H),  showing  the  position  at  December  31, 
1902,  at  which  time  the  separate  accounts  of  the  Citizens  Com- 
pany were  discontinued,  being  then  and  from  that  time  on, 
combined  with  those  of  the  Union  Company. 

UNION  ELECTKIC  LIGHT  &  POWER  COMPANY 
(UNION  COMPANY  NO.  1). 

The  Union  Company  was  accordingly  formed  to  consolidate 
the  Imperial  and  Citizens  Companies,  in  accordance  with  the 


> 


14 


Appendix   A 


articles  of  consolidation  agreed  upon  between  them,  and  it  came 
into  existence  on  May  20,  1902,  as  shown  by  the  Certificate  of 
Consolidation  issued  by  the  Secretary  of  State  for  Missouri  as 
of  that  date. 

The  plan  of  consolidation  and  syndicate  agreement  dated 
May  17,  1902,  provided  for  an  issue  of  $10,000,000.00  capital 
stock,  of  which  $2,000,000.00  was  to  be  Preferred  and  $8,000,- 
000.00  Common  Stock,  and  it  provided  further  for  an  issue 
of  $10,000,000.00  5%  First  Mortgage  thirty-year  Gold  Bonds 
and  for  the  disposition  of  the  stock  and  bonds  in  the  following 
manner : 

Stock : 

The  entire  capital  stock  was  to  be  issued  in  consideration  of 
the  transfer  of  the  properties  of  the  two  Companies,  subject  to 
the  underlying  bonds  of  the  Imperial  Company  ($1,000,000.00) 
and  of  the  City  Lighting  Company    ($552,000.00). 

Bonds : 

The  bonds  of  $4,000,000.00  were  to  be  sold  to  the  syndicate 
at  the  price  of  97%,  the  syndicate  to  also  receive  in  consider- 
ation of  the  purchase  certificates  of  an  equal  amount  of  stock 
of  the  consolidated  Company.  This  sale  of  $4,000,000.00  of 
bonds  was  intended  to  provide  for  the  purchase  of  the  under- 
lying bonds  above  mentioned  and  for  the  cash  requirements  in 
connection  with  the  plans  for  the  construction  and  equipment 
of  the  new  generating  station  and  for  the  development  of  the 
distribution  systems  of  the  consolidated  Company,  involving 
an  estimated  expenditure  during  the  years  of  1902-1903,  of 
$2,300,000.00.  The  balance,  $6,000,000.00  of  bonds  was  to 
be  reserved  in  the  Treasury  for  future  requirements. 

The  bonds  were  sold  and  the  $10,000,000.00  of  stock  was 
issued  in  accordance  with  the  plan  and  agreement,  and  in 
pursuance  of  what  we  would  understand  to  have  been  the  inten- 
tion at  the  beginning,  capital  stock  of  $3,300,000.00  was  re- 
turned to  the  Treasury  by  the  Imperial  and  Citizens  interests, 
making  the  cost  of  $6,700,000.00  to  the  new  Company  for  the 
properties  of  the  two  Companies.  This  cost  was,  however, 
still  further  reduced  by  reason  of  the  reduction  in  capitaliza- 
tion at  the  time  of  the  merger  with  the  Missouri-Edison  in 
JSeptember,  1903,  when  the  outstanding  stock  of  $6,700,000.00 


# 


y 


V 


y 


Appendix   A  25 

was  surrendered  in  exchange  for  $4,350,000.00  of  stock  of  the 
new  Union  Company  (or  Union  Company  No.  2),  this  being 
the  proportion  of  the  capital  stock  issued  under  the  plan  of 
the  merger  to  the  stockholders  of  the  Union  Company  No.  1, 
and  which  with  the  stock  of  $1,500,000.00  provided  to  be  issued 
for  the  acquisition  of  the  shares  of  the  Missouri-Edison,  made 
up  the  total  of  $5,850,000.00  to  be  issued  at  the  formation 
of  the  present  Union  Company,  as  is  set  forth  in  the  report. 

The  outstanding  bonds  of  $552,000.00  of  the  City  Lighting 
Company,  were  retired  in  due  course,  together  with  $846,000.00 
of  the  outstanding  bonds  of  the  Imperial'  Electric  Light,  Heat 
and  Power  Company,  the  cash  being  deposited  with  the  Trustees 
for  the  retirement  of  the  remainder  of  the  Imperial  bonds  of 
$154,000.00. 

Up  to  the  time  of  the  merger  of  September,  1903,  the  Union 
Company  had  expended  $2,289,538.98  for  new  construction, 
principally  in  connection  with  the  Ashley  Street  plant,  and  in 
addition  it  expended  $106,472.52  on  the  Imperial  Plant. 

The  financial  position  of  the  Union  Company  No.  1  at  the 
date  of  the  merger,  or  to  be  more  exact,  at  December  31,  1903, 
at  which  date  the  accounts  were  consolidated  for  the  purpose 
of  the  merger,  may  therefore  be  summarized  thus: 

Capital  Stock *  $10,000,000.00 

Capital  in  Treasury $  3,300.000.00 

Cost  of  Property 10,237,147.02 

Bonds  Union  Company 4,000,000.00 

Bonds  Imperial  Company '  154  000.00 

$13,537,147.02     $14,154,000.00 

Profit  and  Loss  Surplus '  72  522  80 

Bond  Redemption  Fund 154,000.00 

Seckner  Contracting  Company: 

Contract  Account $  90,043.65 

Loan  Account 30,737. 75 

Construction  Account 100,000.00 

Service  Account 12,670.77 

$233,452. 17  $13,691,147.02     $14,226,522.80 
representing: 

Advances  for  Construction 207,295.01 

Net  Current  Assets 26  157. 16 

Net  Current  Assets 301 ,923. 61 

Q,    J      .     ,,  $14,226,522.80    $14,226,522.80 

fit.  Louis,  Mo„ 

November  15,  1909. 


16 


A  P  P  E  N  I)  I  X     A 


PART  II. 

UNION  ELECTRIC  LIGHT  AND  POWER  COMPANY. 

SYNOPSIS  OF  HISTORY  OF  MISSOURI-EDISON 

GROUP  OF  COMPANIES. 

The  Missouri-Edison  Company  was  formed  in  October,  1897,. 
and  was  a  reorganization  of  the  Edison  Illuminating  Company, 
and  of  the  Missouri  Electric  Light  &  Power  Company,  of  which 
the  Edison  Illuminating  Company  owned  or  controlled  all  the 
capital  stock.  The  Edison  Illuminating  Company  had  been 
incorporated  in  October,  1892,  for  the  purpose  of  combining  in 
one  ownership  the  separate  interests  of  the  Missouri  Electric 
Light  &  Power  and  Municipal  Electric  Lighting  &  Power  Com- 
panies, which  it  proceeded  to  do  by  the  acquisition  of  the  shares 
of  the  former  and  of  the  property  and  assets  of  the  latter  Com- 
pany. The  Municipal  Electric  Lighting  &  Power  Company 
had  been  formed  in  1889  to  take  over  and  operate  the  contract 
for  lighting  the  City  of  St.  Louis  for  the  period  of  ten  years 
from  1890  to  1900,  and  shortly  after  its  formation  had  ac- 
quired the  property  of  the  St.  Louis  Illuminating  Company. 
This  last  mentioned  Company  had  previously  taken  over  the 
United  Electric  Light  &  Power  Company,  which  was  in  turn 
the  outcome  of  several  smaller  Companies  dating  back  to  1881, 
or  to  what  was  practically  the  beginning  of  the  electric  lighting 
business  in  the  City  of  St.  Louis. 

The  full  list  of  all  these  Companies  is  as  follows: 

(1)  Brush  Electric  Association. 

(2)  Excelsior  Electric  Company  of  St.  Louis— originally 

the  "Guernsey  &  Scudder  Electric  Company,"  and 
later  the  "Guernsey-Scudder  Electric  Light  Com- 
pany." 

(3)  The  Metropolitan  Electric  Company. 

(4)  St.  Louis  Western  Electric  Light  Company. 

(5)  United  Electric  Light  &  Power  Company — originally 

"The  St.   Louis  Thomson-Houston  Electric   Light 


>. 


V 


y 


y 


Appendix   A 


17 


Company,"    and   later    the    "St.    Louis    Thomson- 
Houston  Electric  Company." 

(6)  St.  Louis  Illuminating  Company. 

(7)  Municipal  Electric  Lighting  &  Power  Company. 

(8)  Edison  Illuminating  Company  of  St.  Louis. 

(9)  The  Missouri  Electric  Light  &  Power  Company. 

(10)  St.   Louis  Electric  Light  &  Power  Company— orig- 

inally the  "St.  Louis  Electric  Power  Company." 

(11)  The  Electric  Light,  Power  &  Conduit  Company  of  St. 

Louis. 

(12)  Missouri-Edison  Electric  Company. 

With  a  view  to  ascertaining  if  possible,  the  amount  and 
nature  of  the  actual  cash  investment  in  these  various  com- 
panies it  was  deemed  advisable  that  we  should  go  back  into  the 
accounts  of  this  earlier  period ;  but  the  only  ledgers  and  books 
of  account  in  existence  at  the  present  time,  so  far  as  we  have 
been  able  to  discover,  are  those  of  the  Missouri-Edison  and  its 
immediate  predecessors,  the  Edison-Illuminating  and  the  Mis- 
souri Electric  Light  &  Power  Companies,  and  these  books  were 
duly  inspected  by  us  along  with  the  relative  minute  books. 
Trial  balance  sheets.  Profit  and  Loss  Accounts  and  Summaries 
of  the  Expenditures  for  Construction  by  the  three  Companies 
are  hereto  annexed  (see  Exhibits  II-L  and  following)  which 
set  forth  the  results  of  the  operations  of  each  one  of  these  for 
the  entire  period  of  its  existence  and  its  financial  position  at  the 
close  of  the  period. 

Only  the  minute  books,  but  no  books  of  account  could  be 
found  for  the  Municipal  and  St.  Louis  Illuminating  Compan- 
ies, although  there  were  on  file  some  important  vouchers  and 
invoices  of  the  Municipal  Company  which,  when  examined  in 
conjunction  with  the  minutes,  afforded  much  precise  and  de- 
tailed information  with  respect  to  the  construction  expenditures 
of  that  Company,  and,  in  fact  enabled  us  to  reconstitute  a 
statement  of  those  expenditures.  Copy  of  this  statement  is 
hereto  annexed  in  Exhibit  II-K. 


I 


f 


18 


Appendix   A 


Neither  the  minute  books  nor  books  of  account  nor  vouchers 
were,  however,  available  in  the  case  of  the  United  Electric 
Light  &  Power  Company  or  the  group  of  smaller  companies 
comprised  in  the  United  Company. 

It  may  be  added  that  there  was  available  for  our  examination 
an  excellent  corporate  history  of  all  these  Companies  from  the 
first  one  down  to  the  Missouri-Edison,  which  was  prepared  by 
the  Company's  attorneys  at  the  time  of  the  merger  in  1903, 
and  from  this  source  we  were  able  to  glean  the  essential  facts 
herein  presented  with  respect  to  the  capital  stocks,  date  of 
incorporation  and  inter-relationship  of  the  earlier  Companies. 
As  to  the  investment  in  Plant  and  Property,  however,  the 
corporate  or  legal  history  would  not,  of  course,  give  the  par- 
ticulars thereof  and  it  has  not  been  possible  for  us  to  obtain 
much  light  on  the  amount  of  the  investment  therein.       In 
default  of  the  exact  data  and  for  the  purpose  of  the  estimates 
of  returns  on  investment  hereinbefore  made,  in  this  report,  we 
have  proceeded  on  the  theory  that  the  property  and  assets  of 
the  St.  Louis  Illuminating  Company,  including  those  of  the 
United  Electric  Light  &  Power  Company   (and  meaning  in 
effect  the  property  and  assets  of  all     Companies  which  pre- 
ceded the  Municipal  Company),  were  worth  at  least  the  $500,- 
000.00  of  bonds  which  the  Municipal  Company  gave  in  pay- 
ment to  the  St.  Louis  Illuminating  Company.     This  estimate 
makes  no  allowance,  however,  for  the  $750,000.00  of  stock 
which  the  Municipal  Company  gave  in  the  purchase,  in  addi- 
tion to  the  bonds  above  mentioned,  and  is  necessarily  the  least 
favorable  presentation  of  the  case  from  the  point  of  view  of  the 
Company. 

As  in  the  case  of  the  Companies  in  the  Union  Group,  some 
understanding  of  the  history  of  the  Missouri-Edison  group  of 
Companies  is  essential  to  a  clear  grasp  of  the  whole  situation, 
and  we  give  here  a  brief  synopsis  of  the  history  of  these  Com- 
panies as  follows: 

BRUSH  ELECTRIC  ASSOCIATION. 

This  Company  was  incorporated  July  6,  1881,  with  an  au- 
thorized capital  stock  of  $250,000.00  'Ho  acquire  by  way  of 
license,  assignment  or  otherwise  *  *  *  all  rights  *  *  *  ac- 
quired or  held  by  the  Brush  Electric  Company  of  Cleveland, 


< » 


i 


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Appendix   A 


19 


Ohio,  under  any  letters  patent  of  the  United  States  for  the 
manufacture  and  use  *  *  *  Qf  dynamo — electric  ma- 
chines and  apparatus.     *     *     * 

By  assignment  made  some  time  prior  to  December  31,  1889 
(we  quote  again  from  the  corporate  history)  but  of  which  no 
record  can  be  found,  the  Company,  which  seems  to  have  had  no 
real  estate,  appears  to  have  transferred  all  its  properties  and 
franchises  to  the  United  Electric  Light  &  Power  Company. 

EXCELSIOR  ELECTRIC  COMPANY  OF  ST.  LOUIS. 

This  Company  was  originally  incorporated  as  the  "Guernsey 
&  Scudder  Electric  Light  Company''  on  June  13,  1885;  on 
December  28,1885,  its  name  was  changed  to  "Guernsey-Scudder 
Electric  Light  Company,"  and  on  April  25,  1887,  to  the  "Ex- 
celsior Electric  Company  of  St.  Louis." 

The  authorized  capital  was  $13,000.00. 

On  June  16,  1888,  the  Company  executed  a  chattel  mortgage 
or  deed  of  trust  covering  all  its  property  and  franchises  (it 
appears  to  have  owned  no  real  estate)  to  Manning  Tredway, 
Trustee  for  Dwight  Tredway,  to  secure  payment  to  the  latter 
of  two  promissory  notes  of  $6,350.00  each.  Default  having 
been  made  in  payment  of  these  notes,  the  Trustee,  on  August 
30,  1888,  sold  to  Dwight  Tredway,  for  the  sum  of  $6,550.00 
all  the  property  and  franchises  of  the  Company,  and  he  subse- 
quently transferred  the  same  to  the  Metropolitan  Electric  Com- 
pany. 

THE  METROPOLITAN  ELECTRIC  COMPANY. 

This  Company  was  incorporated  September  1,  1888,  with  an 
authorized  capital  of  $100,000.00. 

After  its  incorporation  the  Company  appears  to  have  acquired 
all  the  property  and  assets  of  the  Excelsior  Electric  Company  of 
St.  Louis  from  Dwight  Tredway,  to  whom  the  same  had  been 
sold,  as  above  stated,  on  August  30,  1888.  The  Excelsior  Com- 
pany appears  to  have  owned  no  real  estate  and  (as  the  corporate 
history  alleges)  a  search  of  the  records  of  transfers  of  real  and 
personal  property  showed  no  entry  of  any  transfer  from  Dwight 
Tredway  to  the  Metropolitan  Company  or  to  any  other  corpor- 
ation or  person.  It  was  noted,  however,  that  the  Metropolitan 
Company  was  incorporated  only  two  days  after  the  sale  to 


i\ 
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20 


Appendix    A 


Dwight  Tredway,  and  that  said  Tredway  subscribed  to  996 
shares  of  the  total  issue  of  1000  shares  of  the  Company's  stock. 
It  is  believed  that  he  paid  for  his  stock  with  the  property  of 
the  Excelsior  Company. 

On  February  28,  1889,  the  Company  transferred  by  deed 
all  its  property  and  assets  (except  its  book  accounts,  bills 
receivable,  cash  on  hand  and  incandescent  plant)  to  the  United 
Electric  Light  &  Power  Company  (then  ''The  St.  Louis  Thom- 
son-Houston Electric  Company")  in  consideration  of  the 
amount  of  $51,000.00  of  stock  of  the  latter  corporation.  The 
incandescent  plant  reserved  in  this  deed  appears  to  have  been 
electrical  machinery  which  had  been  bought  from  the  West- 
inghouse  Company  but  not  paid  for;  it  was  subsequently 
turned  over  to  the  Missouri  Electric  Light  &  Power  Company 
which  became  the  licensee  of  the  Westinghouse  Company  for 
its  electrical  machinery  and  patents  covering  the  same. 

ST.  LOUIS  WESTERN  ELECTRIC  LIGHT  COMPANY. 

This  Company  was  incorporated  November  28,  1887,  with 
an  authorized  capital  stock  of  $60,000.00  and  would  appear 
to  have  operated  under  the  franchise  to  F.  L.  Johnston,  the 
President  of  the  Company,  who,  on  March  4th,  1887,  had 
filed  his  acceptance  of  the  terms  of  ordinance  12723,  but  does 
not  seem  to  have  made  any  assignment  of  the  franchise  to  the 
HCompany.  The  Company,  however,  made  the  returns  of  its 
gross  receipts  to  the  City.  Johnston  owned  apparently  598 
shares  out  of  the  600  shares  of  Capital  Stock  and  is  believed 
to  have  turned  over  the  franchise  to  the  Company  together 
with  other  property  in  payment  for  his  stock. 

On  February  1,  1889,  the  Company  transferred  by  deed  all 
its  property  and  franchises  (it  does  not  appear  to  have  owned 
any  real  estate)  to  the  United  Electric  Light  &  Power  Com- 
pany in  consideration  of  the  sum  of  $20,000.00  and  of  $27,- 
500.00  of  the  stock  of  the  latter  corporatiSh. 

UNITED  ELECTRIC  LIGHT  &  POWER  COMPANY. 

This  Company  was  incorporated  originally  as  "The  St.  Louis 
Thomson-Houston  Electric  Light  Company"  on  October  23, 
1883.     On  April  18,  1884,  the  name  of  the  Company  was 


t 


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A  p  p  E  ]^  1)  I  X    A 


21 


changed  to  "St.  Louis  Thomson-Houston  Electric  Company." 
On  March  25,  1889,  it  was  again  changed  to  the  "United  Elec- 
tric Light  &  Power  Company." 

The  capital  stock  as  originally  authorized,  was  $25,000.00. 
On  February  29,  1884,  it  was  increased  to  $50,000.00;  on 
February  7,  1885,  to  $150,000.00  and  on  March  25,  1889  to 
$500,000.00. 

On  February  28,  1889,  the  Company  acquired  by  deed  from 
the  Metropolitan  Electric  Company,  all  the  property  and  fran- 
chises (except  the  book  accounts,  bills  receivable,  cash  on  hand 
and  incandescent  plant)  of  the  latter  corporation,  which  had 
previously  acquired  all  the  property  and  franchises  of  the 
Excelsior  Electric  Company  of  St.  Louis. 

On  February  1,  1889  the  Company  acquired  by  deed  all 
properties  and  franchises  of  the  St.  Louis  Western  Electric 
Light  Company,  and  at  some  time  prior  to  December  31,  1889, 
through  a  transfer  of  which  no  record  has  been  found,  the 
Company  acquired  the  property  and  franchises  of  the  Brush 
Electric  Association. 

On  December  31,  1889,  the  stockholders  of  the  St.  Louis 
Illuminating  Company  authorized  the  purchase  of  the  prop- 
erty and  franchises  of  the  United  Electric  Light  &  Power 
Company  in  consideration  of  all  the  increased  capital  stock 
of  their  Company,  namely,  $400,000.00  and  in  addition  all 
the  bonds  of  their  Company,  namely,  $500,000.00;  on  the 
same  date  the  United  Electric  Light  &  Power  Co.  transferred 
by  deed  all  its  property  and  franchises  to  James  J.  Davis  for 
the  sum  of  $700,000.00  and  said  Davis  and  wife  transferred 
to  the  St.  Louis  Illuminating  Company  for  the  sum  of  $900,- 
000.00. 


Generally  speaking  in  reference  to  all  these  five  Companies, 
the  corporate  history  recites  that  they  were  all  organized  under 
the  laws  of  Missouri  and  their  duration  fixed  at  fifty  years. 
The  Brush,  Excelsior  and  United  Companies  all  appear  to  have 
filed  acceptances  of  the  terms  of  City  Ordinance  12723  and  to 
have  furnished  the  bonds  required  by  the  City  thereunder, 
but  to  have  possessed  no  other  grants  or  franchises  from  the 
City.  The  Metropolitan  owned  no  franchise  except  that  under 
Ordinance  12723  derived  from  the  Excelsior  Company.    Men- 


Mito 


y 


i 


i 


,  I 


i 


22 


Appendix   A 


tion  has  already  been  made  of  the  fact  that  the  St.  Louis 
Western  Electric  Light  Company  operated  under  Ordinance 
12723  by  reason  of  F.  R.  Johnston's,  the  President,  filing  of 
his  acceptance  of  the  terms  thereof,  although  no  evidence  is 
found  of  his  assignment  of  the  same  to  the  Company.  Out- 
side of  the  main  facts  hereinbefore  recorded,  the  history  re- 
cites with  reference  to  each  one  of  the  Companies  that  ''fur- 
ther information  is  not  obtainable  because  of  the  loss  of  the 
Company's  record  books/' 

ST.  LOUIS  ILLUMINATING  COMPANY. 

This  Company  was  incorporated  on  May  26,  1885,  with  a 
capital  stock  of  $100,000.00,  to  which  the  chief  subscriptions 
were  those  of  Chas.  Heisler  for  499  shares,  and  of  W.  C.  Allen 

for  300  shares. 

At  the  first  meeting  of  directors  on  May  28,  1885,  contracts 
were  approved  under  which  the  Heisler  Electric  Light  Com- 
pany and  Chas.  Heisler,  in  consideration  of  $50,000.00  paid 
by  the  Illuminating  Company,  agreed  to  sell  the  exclusive  right 
to  use  for  central  station  lighting  only  within  the  City  and 
County  of  St.  Louis,  the  Heisler  patent  cut-offs,  etc.  The  con- 
tract provided  also  for  the  assignment  to  the  St.  Louis  Illumi- 
nating Company  of  20%  of  such  stock  as  might  thereafter  be 
received  by  the  Heisler  Electric  Light  Company  from  other 
companies  organized  throughout  the  United  States,  but  the 
Heisler  Company  was  later  released  from  this  provision  in  the 
contract,  the  consideration  for  the  release  being  the  payment 
by  the  Heisler  Company  of  $1,000.00  in  cash  and  the  transfer 
of  120  shares  of  St.  Louis  Illuminating  Company  stock. 

On  June  23,  1885,  the  proposal  of  the  Heisler  Company  to 
sell  a  120  light  machine  with  its  exciters,  two  lines  of  wire  on 
Sixth  street  and  two  lines  on  Fourth  street  complete  and  in 
operation,  and  some  other  equipment  for  $2,000.00  was 
accepted.  It  was  also  decided  to  purchase  from  the  Heisler 
Company  two  machines  for  240  lights  for  $2,250.00. 

In  October,  1885,  the  Treasurer  was  authorized  to  purchase 
lots  20  and  21,  City  Block  50,  on  the  South  side  of  Gratiot 
between  Second  and  Third  streets,  at  $50.00  per  front  foot. 
These  lots  were  transferred  through  all  subsequent  reorgani- 
zations of  this  and  the  successor  Companies  and  are  owned  by 


r 


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Appendix   A 


23 


the  Union  Electric  Light  &  Power  Company  at  the  present 
time. 

In  May,  1886,  the  purchase  was  authorized  from  W.  R. 
Allen  of  his  rights  to  the  Heisler  dynamos  and  other  apparatus 
in  the  State  of  Missouri,  for  $15,000.00  cash  and  $7,000.00  in 
the  Company's  notes  in  one,  two  and  three  years,  and  secured 
on  the  Company's  property  in  St.  Louis.  Some  months  later 
these  rights  were  resold  to  the  Pleisler  Company  in  consider- 
ation of — 

(1)  A  receipt  in  full  for  their  claims  against  the  Com- 

pany for  work  done  and  material  furnished  . 

(2)  A  contract  under  which  they  agreed  to  furnish  ma- 

chinery in  future  at  25%  over  manufacturing  cost, 
and, 

(3)  Their  undertaking  to  replace  all  cut-outs  of  the  old 

construction  now  in  use  by  new  ones,  and  to  ex- 
change the  four  150-light  machines  for  two  ma- 
chines of  double  the  capacity  free  of  cost. 

In  November,  1888,  it  was  resolved  to  sell  the  remaining 
treasury  stock  of  207  shares  at  60.  It  is  not  exactly  clear  how 
the  207  shares  in  question  came  into  the  treasury,  but  perhaps 
this  is  not  material. 

The  increase  of  the  capital  stock  from  $100,000.00  to  $500,- 
000.00  was  authorized  on  December  30,  1889,  and  on  Decem- 
ber 31,  1889,  an  issue  of  bonds  of  $500,000.00  was  authorized 
to  be  dated  August  1,  1889,  and  payable  August  1,  1919,  with 
interest  at  6%  per  annum  and  secured  by  trust  deed  to  the 
Atlantic  Trust  Company  of  New  York  as  Trustee.  At  the 
same  time  it  was  resolved  to  purchase  all  the  property  of  the 
United  Electric  Light  &  Power  Company  and  to  pay  therefor 
the  increase  in  the  stock  ($400,000.00)  and  all  the  newly 
created  bonds  of  $500,000.00. 

At  a  stockholder's  meeting  on  May  16,  1890,  it  was  decided 
to  accept  the  proposition  of  the  Municipal  Electric  Lighting  & 
Power  Company  to  purchase  the  property  of  the  St.  Louis 
Illuminating  Company  for  $750,000.00  capital  stock  and  $500,- 
000.00  in  bonds  of  the  Municipal  Company. 


t 


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24*  Appendix   A 


MUNICIPAL  ELECTEIC  LIGHTING  &  POWER 

COMPANY. 

This  Company  was  incorporated  on  June  19,  1889,  with  a 
capital  stock  of  $750,000.00  in  shares  of  $10.00  each,  the 
chief  subscriber  thereto  being  Charles  Sutter  for  74,400  shares. 
In  May,  1890,  the  capital  stock  was  increased  to  $1,500,000.00. 
The  Company  was  formed  to  take  over  and  operate  the  City 
Lighting  contract  for  a  period  of  10  years  from  January  1, 
1890. 

At  the  first  meeting  of  the  stockholders  on  June  19,  1889, 
an  issue  of  first  mortgage  bonds  of  $750,000.00  was  author- 
ized to  be  dated  June  19,  1889,  and  payable  in  20  years  with 
interest  at  6%  per  annum.  Later,  some  legal  objections  aris- 
ing, the  date  of  issue  was  changed  to  read  June  20,  1889.  Still 
later,  in  May,  1890,  it  was  determined  to  increase  the  bonded 
debt  to  $1,500,000.00,  and  upon  the  surrender  and  cancella- 
tion of  the  bonds  theretofore  issued,  of  $750,000.00,  to  issue 
a  new  series  of  bonds  of  $1,500,000.00  to  be  dated  February 
1,  1890,  and  maturing  February  1,  1910,  with  interest  at  6% 
per  annum. 

It  was  noted  that,  included  in  the  property  pledged,  was 
the  following  real  estate,  although  the  minutes  did  not  spe- 
cifically record  the  purchase  thereof. 

Lots  5-6-7-8  block  2,  Johnson's  addition  to  the  City  of 
St.  Louis,  and  in  City  Block  456,  fronting  in  the 
aggregate  100  ft.  on  the  eastern  line  of  19th  (for- 
merly Johnson  Street)  by  a  depth  eastwardly  of  110 
ft.  and  bounded  on  the  north  by  property  of  the 
Missouri  Pacific  Railway. 

Lots  7-8  and  the  northern  10  ft.  of  lot  6  in  block  1,  John- 
■  son's  addition,  and  in  City  block  2286,  having  an 

aggregate  front  of  60  ft.  on  the  western  line  of  19th 
(formerly  Johnson  street)  and  bounded  on  the  north 
by  the  property  of  the  Missouri  Pacific  Railway.  This 
property  was  the  site  of  the  Power  Plant  of  the 
Municipal  Company,  and  together  with  adjacent 
property  acquired  by  its  successor,  the  Missouri-Edi- 
son Electric  Company,  is  still  owned  by  the  Union 
Electric  Light  &  Power  Co. 


A  i»  r  E  N  D I  X   A 


25 


At  a  meeting  of  the  directors  June  19,  1889,  Mr.  Sutter 
reported  he  had  made  two  contracts  wdth  the  City  of  St.  Louis 
for  furnishing  Arc  Lighting  and  he  proposed  making  con- 
tracts with  the  Company  by  which  it  would  furnish  the  lighting 
contracted  for  by  him  and  that  as  a  consideration  therefor,  he 
would  transfer  all  his  franchises  for  furnishing  commercial 
light  and  power  and  it  was  arranged  to  enter  into  a  contract  to 
that  eft'ect.  It  was  also  decided  to  assume  various  contracts 
he  had  made  for  supplies  and  materials  in  his  name  for  the 
construction  and  equipment  of  an  electric  light  plant.  In 
consideration  of  the  above,  the  stock  he  subscribed  for  was 
issued  to  him  fully  paid. 

The  remaining  half  of  the  capital  stock,  being  all  of  the  in- 
crease authorized  in  May,  1890,  together  with  $500,000.00 
bonds  (being  part  of  the  $1,500,000.00  authorized  at  the  same 
time)  was  issued  in  payment  for  the  purchase  of  the  real 
estate  and  personal  property,  contracts,  rights,  etc.,  of  the  St. 
Louis  Illuminating  Company. 

As  intimated  in  the  preliminary  remarks  of  the  present 
memorandum,  the  books  of  account  of  the  Municipal  Com- 
pany were  not  available  for  our  inspection,  but  the  minute 
book  was,  and  afforded  complete  information  regarding  the 
bonds  issued  by  the  Company  from  time  to  time.  The  ma- 
jority of  the  bonds  would  seem  to  have  been  disposed  of  to  or 
through  Ladenburg,  Thalmann  &  Company,  or  to  a  syndicate 
composed  of  Ladenburg,  Thalmann  &  Company  and  others, 
which  was  formed  to  finance  the  Company  and  which  first 
made  advances  on  the  security  of  the  bonds,  and  then  later 
purchased  the  bonds  outright  in  settlement  of  the  advances. 
The  transactions  in  connection  with  the  various  advances  are 
somewhat  numerous  and  it  is  not  practicable  to  account  for  the 
exsici  disposition  of  all  the  bonds,  but  the  references  in  the  min- 
utes are  sufficiently  clear  and  explicit  to  warrant  the  statement 
that  they  were  sold  for  cash  and  the  proceeds  expended  on  the 
property  of  the  Company. 

Thus  at  a  meeting  of  the  directors  on  September  17,  1889, 
the  Secretary  was  authorized  to  sell  600  bonds  at  90,  and  on 
October  2,  the  Trustee  was  authorized  to  deliver  400  bonds 
of  this  issue  (June  20,  1889)  to  take  up  a  like  number  of 
honds  of  the  erroneous  issue  (June  19,  1889)  heretofore  sold 


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26 


Appendix   A 


and  delivered  to  Ladenburg,  Thalmann  &  Company.  Again  on 
November  6th,  the  secretary  reported  that  he  had  caused  the 
Trustee  to  deliver  to  Landenburg,  Thalmann  &  Company,  $400,- 
000.00  bonds,  of  which  $200,000.00  were  to  be  used  in  pay- 
ment of  the  indebtedness  to  Jenney  &  Company  for  dynamos, 
lamps,  etc. 

Again,  at  a  meeting  on  November  26,  1889,  the  Trustee  was 
directed  to  deliver  $130,000.00  bonds  to  Ladenburg-Thalmann 
&  Company,  same  having  been  sold  to  them  at  90. 

On  November  6,  the  secretary  reported  that  he  had  delivered 
20,000  to  Rohan  Brothers  Boiler  Manufacturing  Company  at  95 
and  taken  that  Company's  receipt  for  $19,000.00.  On  Jan- 
uary 25,  1890,  it  was  agreed  to  pay  16  bonds  to  Charles  Sutter 
in  settlement  of  his  account  of  95  flat. 

With  respect  to  the  advances  from  the  syndicate  and  to  the 
bonds  pledged  as  collateral  therefor,  the  minutes  of  March  29, 
1890,  refer  to  loans  aggregating  $149,910.00,  as  to  which  it 
was  resolved  to  execute  notes  for  that  amount  and  to  pledge 
$167,000.00  bonds  as  security.  On  April  8,  1890,  reference 
is  made  to  further  loans  and  notes  of  $97,500.00  and  to  the 
pledge  of  $108,000.00  bonds.  On  May  2,  1890,  further  notes 
are  authorized  of  $50,000.00  and  $55,000.00  bonds  ordered 
pledged  therefor.  On  May  7,  1890,  it  was  ordered  that  the 
syndicate  be  given  bonds  up  to  70%  of  the  notes  then  held 
for  them,  and  the  Treasurer  was  authorized  to  deliver  $96,- 
000.00  (or  $97,000.00)  bonds  (of  which  $48,000.00  were  to 
be  of  the  old  issue  and  $48,000.00  or  $49,000.00  of  the  new 
issue)  additional  to  bonds  then  held  by  the  syndicate,  mak- 
ing 427  bonds  so  held  in  all.  On  July  26,  1890,  the  state- 
ment is  made  that  373  bonds  of  the  old  issue  had  been  sold. 

On  September  18,  1890,  settlement  was  directed  to  be  made 
with  the  Fort  Wayne  Electric  Company  for  lights  and  appli- 
cants supplied  by  them,  and  Ladenburg,  Thalmann  &  Com- 
pany were  directed  to  deliver  in  payment  therefor  $200,000.00 
bonds  at  95. 

On  November  5,  1892,  the  syndicate  having  up  to  that  time 
made  advances  of  $466,000.00  and  holding  bonds  for  $427,- 
000.00  offered  to  accept  the  bonds  so  held  by  them  at  80c  on 
the  $1.00  and  to  apply  the  same  as  a  payment  on  account,  which 
offer  was  accepted. 


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Appendix   A  27 

These  various  transactions  may  be  summed  up  in  the  fol- 
lowing manner: 

Date  op  Minute.  Particulars  of  Bonds.  Amount. 

1889,  November  6,  $400,000.00  bonds  delivered  to  Lan- 
denburg, Thalmann  &  Company, 
of  which  $200,000.00  were  to  be 
reserved  for  payment  of  indebted- 
ness  to    Jenney  &  Company  and 

$200,000.00  were  sold  at  90 $200,000.00 

Sold  to  Rohan  Brothers  Boiler  Man- 
ufacturing Company 20,000.00  @  95 

1889,  November  26,  Delivered  to  Ladenburg,  Thalmann 

&  Company 130,000.00  @  90 

1890,  January  25,      Delivered  to  Charles  Sutter 16,000.00  @  95 

Difference  presumably  delivered  and 
sold  to  contractors 6,000.00 

$372,000.00 
1890,  May  7,  Delivered  at  70  to  syndicate  as  secur- 

ity for  advances  up  to  that  time, 
viz.:  426  bonds,  of  which  it  was 
stated  that  48  were  to  be  of  the  old 
issue  and  48  of  the  new  (426-48)..      378,000.00  @  70 

Total  bonds  of  first  issue $750,000.00 

1890,  May  15,  Issued  in  connection  with  purchase 

of  St.  Louis  Illuminating  Company      500,000.00  @  par 

1890,  September  18  Issued  to  Fort  Wayne  Electric  Co., 

in  settlement  of  purchase 200,000.00  @  95 

1890,  May  7,  Balance  (48)  of  426  bond  delivered 

to  syndicate  and  subsequently  ac- 
cepted by  them  @  80  on  account.        48,000.00  @  80 
Additional  bond  evidently  delivered 

to  syndicate 1,000.00  @  80 

Difference  presumably  sold  but  not 

identified  in  minutes 1,000.00 

Total  of  second  issue $750,000.00 

Total  of  both  issues $1,500,000.00 


It  will  be  clear  that  the  minutes  were  more  than  usually 
explicit  regarding  the  successive  sales  of  bonds  and  the  pur- 
poses for  which  they  were  to  be  applied,  and  from  this  source 
and  from  vouchers  and  other  apparently  authentic  memoranda 
which  had  also  been  preserved,  we  w^ere  able  to  reconstruct 


U 


28 


Appendix   A 


i  f' 


with  reasonable  definiteness  the  cost  of-  property  account  of 
the  Municipal  Company  from  the  time  of  its  formation  in  1889 
up  to  its  absorption  by  the  Edison  Electric  Illuminating  Com- 
pany in  1893.  The  statement  thereof  is  hereto  annexed.  (See 
Exhibit  II-K).  It  will  be  seen  that  we  have  adopted  as  the 
value  of  the  investment  the  amount  of  the  bonds  and  floating 
debt  of  an  aggregate  of  $1,950,000.00  (without  consideration 
of  the  capital  stock  amounting  to  $1,500,000.00).  In  view 
of  the  fact  that  the  books  are  not  available  and  the  earnings 
are  not  now  ascertainable  we  do  not  include  the  value  of  the 
investment  in  our  calculations  regarding  the  return  on  the 
investment  until  the  year  1893,  when  the  property  was  taken 
over  by  the  Edison  Illuminating  Company. 

MISSOURI  ELECTRIC  LIGHT  &  POWER  COMPANY. 

This  Company  was  incorporated  on  December  29,  1888,  and 
at  the  first  meeting  of  the  incorporators  on  January  2,  1889, 
it  was  decided  to  issue  bonds  in  the  sum  of  $500,000.00  for  the 
purpose  of  providing  a  fund  which,  in  addition  to  the  capital 
stock  of  the  company  would  be  sufficient  to  purchase  the  West- 
inghouse  Electric  Company's  rights  in  sundry  *  *  *  pat- 
ents on  improvements  on  apparatus  *  *  *  also  to  pur- 
chase real  estate,  erect  buildings,  purchase  machinery,  etc.,  20- 
year  First  Mortgage  5%  bonds  for  $500,000.00  dated  April 
1,  1889,  were  issued  in  due  course.  It  is  our  understanding 
that  the  plant  and  machinery  proposed  to  be  acquired  was  the 
incandescent  plant  which  had  been  purchased  from  the  West- 
inghouse  Company  but  not  paid  for  by  the  Metropolitan  Elec- 
tric Company,  and  which  was  reserved  in  the  deed  from  the 
Metropolitan  to  the  United  Electric  Light  &  Power  Company. 

At  a  meeting  of  directors  on  January  15,  1889,  the  purchase 
for  the  sum  of  $17,590.00  of  the  lot  at  the  southeast  comer 
of  Twentieth  and  Lucas  (afterwards  we  believe  changed  to 
Locust)  Street,  being  169  feet  on  Lucas  Street  by  154  feet 
11  inches  on  Twentieth  Street,  was  approved  as  a  site  for  the 
plant.  A  month  or  two  later  the  adjacent  lot  on  the  east 
fronting  100  feet  on  Lucas  Place  was  purchased  for  $120.00  a 
foot. 

At  a  meeting  on  February  1,  1889,  the  Committee  previously 
instructed  to  inquire  into  the  matter  reported  that  the  West- 


1. 


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Appendix   A 


29 


inghouse  rights  in  St.  Louis  were  held  by  A.  E.  Adreon  of 
Pittsburg,  who  was  willing  to  sell  the  same  for  $600,000.00, 
being  presumably  the  entire  capital  stock  of  the  company  and 
the  purchase  was  approved  on  the  basis  proposed,  but  we  are  not 
clear  that  stock  was  delivered  to  him.  In  any  event  it  sub- 
sequently came  into  the  possession  or  control  of  the  Edison 
Illuminating  Company  on  the  formation  of  that  Company,  as 
will  appear  from  our  remarks  on  the  Edison  Company. 

At  a  stockholder's  meeting  April  24,  1891,  it  was  voted  ta 
increase  the  capital  stock  to  $1,100,000.00,  but  it  does  not 
appear  that  this  increase  was  ever  carried  into  effect. 

At  a  stockholder's  meeting  on  May  1,  1891,  an  issue  was 
authorized  of  Second  Mortgage  bonds  of  $600,000.00  to  be 
dated  May  1,  1891,  and  to  bear  interest  at  6%.  These  bonds 
are  still  outstanding  at  present,  having  become  First  Mortgage 
bonds  by  reason  of  the  prior  Mortgage  bonds  having  been  re- 
tired by  the  Missouri-Edison  Electric  Company.  In  addition 
to  its  bonds  the  Company  negotiated  its  bills  payable  from  time 
to  time,  its  indebtedness  on  this  account  having  increased  ta 
$478,596.03,  at  the  date  of  the  transfer  to  the  Missouri-Edison 
in  1897. 

At  a  stockholders'  meeting  on  S^tember  29,  1897,  it  was 
resolved  to  convey  to  A.  D.  Brown  all  the  property  of  the  cor- 
poration subject  to  the  two  deeds  of  trust  theretofore  made  by 
the  Company,  namely, — 

Deed  dated  April  1,  1889,  securing  issue  of  $500,000.0a 
6%  20-year  bonds. 

Deed  dated  May  1,  1891,  securing  issue  of  $600,000.0a 
6%  30-year  bonds. 

Subsequent  meetings  would  appear  to  have  been  held  from 
time  to  time  thereafter  until  1903,  and  which  indicate  that  the 
separate  corporate  existence  of  this  Company  was  continued 
throughout  the  life  of  the  Missouri-Edison  and  until  the  merger 
of  that  Company  with  the  Union  Electric  Light  &  Power 
Company,  but  these  latter  meetings  were  merely  for  the  traris-^ 
action  of  routine  business  and  disclose  nothing  of  importance- 
or  which  would  seem  to  us  to  call  for  comment. 


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30  AppendixA 

The  first  mortgage  bonds  of  $500,000.00  above  referred  to 
were  apparently  all  sold  for  cash  at  par,  and  the  second  mort- 
gage bonds  of  $600,000.00  were  disposed  of  thus: — 

A  first  lot  of  $333,000.00  at  60  (the  price  fixed  at  a  meet- 
ing of  directors  on  June  30,  1891) ;  and, 

A  second  lot  of  $267,000.00  at  80  (the  price  fixed  at  a 
meeting  of  directors  on  December  22,  1892). 

The  discount  of  $133,200.00  in  the  former  case  and  $53,- 
400.00  in  the  latter  was  debited  to  construction. 

An  inspection  of  the  Company's  ledgers  discloses  that  the 
whole  of  the  funds  raised  on  these  bonds  or  bills  payable,  to- 
gether with  a  further  sum  of  $545,645.85  out  of  profits,  up 
to  September  31,  1897,  were  expended  on  the  property  of  the 
Company  as  follows: 

On  property  and  plant $    771.359.78 

On  overhead  system    (including  discount  of 

$186,600.00)    1,278,138.47 

On  underground  conduit 74,743.63 

$2,124,241.88 


The  funds  being  provided  in  the  following  manner: 

From  the  sale  of  bonds  of  $500,000.00  at  par.  .$  500,000.00 
From  the  sale  of  bonds  of  $333,000.00  at  60 . .  333,000.00 
From  the  sale  of  bonds  of  $267,000.00  at  80 ... .      267,000.00 

$1,100,000.00 

From  bills  payable 478,596.03 

From  undivided  profits    (before  providing  for 
depreciation)    545,645.85 

Total  as  above $2,124,241.88 


Appendix   A 


31 


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EDISON  ILLUMINATING  COMPANY  OF  ST.  LOUIS. 

This  Company  was  incorporated  on  October  24,  1892,  with 
a  nominal  capital  of  $5,000.00  which  was  increased  to  $3,500,- 
000.00  in  January,  1893.  In  the  same  month  an  issue  was  au- 
thorized of  $3,000,000.00  6%  First  Mortgage  bonds  to  be  dated 
February  1,  1893. 

At  a  meeting  on  March  7,  1893,  a  proposition  was  submitted 
from  the  General  Electric  Company  to  execute  a  license  of  the 
right  to  use  all  apparatus,  etc.,  in  consideration  of  $800,000.00 
of  which  $500,000.00  was  to  be  paid  in  capital  stock  and  $300,- 
000.00  in  First  Mortgage  bonds,  which  proposition  was  ac- 
cepted. On  July  24,  1893,  the  capital  stock  was  increased  to 
$4,000,000.00. 

On  July  31,  1893,  an  issue  of  6%  bonds  was  authorized  to 
the  amount  of  $4,000,000.00  to  be  dated  August  1,  1893,  and 
to  embrace  all  property  of  the  Company  in  the  City  or  County 
of  St.  Louis,  etc.,  and  all  shares  of  capital  stock  owned  by  the 
Company  in  any  corporation  whether  held  directly  or  in  trust 
for  it.  This  issue  of  bonds  superseded  and  cancelled  the  one 
of  $3,000,000.00  previously  authorized.  On  October  14,  1893, 
it  was  resolved  to  purchase  the  shares  of  the  Missouri  Electric 
Light  &  Power  Company  upon  the  following  terms : 

(1)  The  issue  of  20,000  shares  of  capital  stock  of  this 
Company. 

(2)  The  issue  and  delivery  of  850  shares  of  the  5-30  6% 
gold  bonds,  dated  August  1,  1893,  of  this  Company. 

(3)  The  assumption  and  payment  by  this  Company  of 
the  interest  and  principal  as  they  respectively  ma- 
ture of  the  First  Mortgage  bonds  of  $1,100,000.00 
excluding  interest  payable  prior  to  May  1,  1893. 

'  (4)   The  assumption  and  payment  of  certain  liabilities 
of  minor  importance. 


32 


Appendix   A 


At  the  same  meeting  it  was  also  agreed  to  purchase  from 
James  Campbell  the  property  of  the  Municipal  Electric  Light- 
ing &  Power  Company  as  of  May  1,  1903,  and  acquired  by  the 
said  Campbell  from  the  said  Municipal  Company  by  deed 
dated  October  13,  1893,  but  excluding  the  two  contracts  for 
public  lighting  held  by  the  Municipal  Company  upon  the 
following  terms: 

(1)  The  issue  of  15,000  shares  of  capital  stock. 

(2)  The  issue  of  1,950  5-30  6%  gold  bonds,  dated  August 
1,  1892. 

(3)  The  acceptance  of  an  assignment  from  said  Munici- 
pal Company  of  the  two  contracts  for  public  light- 
ing, dated  March  13,  1889. 

(4)  Certain  other  conditions  of  relatively  minor  import- 
ance. 

This  was  of  course  on  the  basis  of  exchanging  the  stock  for 
a  like  amount  of  the  stock  of  the  former  Company  and  issuing 
$1,950,000.00  of  its  bonds  in  payment  of  the  bonded  and 
floating  debt  of  the  former  Company. 

At  a  meeting  of  November  21,  1893,  it  was  voted  to  issue 
$400,000.00  bonds  to  the  General  Electric  Company  under  the 
agreement  theretofore  entered  into  with  them,  but  at  a  subse- 
quent meeting  on  December  9,  1893,  the  amount  of  bonds  to  be 
delivered  to  them  was  reduced  to  $310,000.00.  This  made  a 
total  of  $4,000,000.00  capital  stock  and  $3,110,000.00  of  bonds 
issued  at  the  inception  of  the  Company  and  for  the  following 
purposes,   namely — 

Stock.  Bonds. 

To  Municipal  Company $1,500,000.00     $1,950,000.00 

Missouri  Electric  Company.   2,000,000.00  850,000.00 

General  Electric  Company. .      500,000.00         310,000.00 


$4,000,000.00    $3,110,000.00 


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Appendix   A 


33 


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At  a  meeting  of  May  20,  1895,  the  sale  of  $500,000.00  bonds 
was  authorized  at  75.  Apparently  only  $470,000.00  of  these 
bonds  were  sold.  The  discount  of  $117,500.00  thereon  was 
charged  ^to  Plant  Construction.  The  balance  of  $30,000.00 
bonds  was  apparently  issued  in  payment  at  par  for  legal  serv- 
ices of  Judge  Madill. 

The  minutes  from  then  on  disclosed  no  further  transactions 
of  importance.  Subsequently  the  Company  defaulted  on  its 
bonds  and  it  was  reorganized  as  the  Missouri-Edison  Electric 
Company  under  the  plan  and  agreement  of  reorganization 
and  on  the  basis  of  the  exchange  of  securities,  which  are  later 
referred  to  in  our  remarks  on  the  Missouri-Edison  Company. 
To  effectuate  the  plan  the  property  of  the  Company  was  deeded 
to  A.  D.  Brown  by  whom  it  was  then  transferred  to  the  Mis- 
souri-Edison. 

An  inspection^  of  the  Company's  ledgers  discloses  that  the 
financial  condition  of  the  Company  at  the  date  of  the  sale  by 
the  Trustee  to  the  Missouri-Edison  Company  was  as  follows: 

Cost  of  property $7,497,394.94 


Made  up  of  the   following  items,   distinguishing  between 
charges  offset  by  stock  and  those  offset  by  bonds: 

Bonds.  Stock, 

For  acquisition  of — 

Municipal   Company $1,950,000.00     $1,500,000.00 

Missouri  Electric  Light  & 

Power  Co 850,000.00       2,000,000.00 

Issued  to  General  Electric  Com- 
pany        310,000.00         500,000.00 


$3,110,000.00    $4,000,000.00 

3,110,000.00 


$7,110,000.00 


34 


Appendix   A 


Appendix   A 


Other  charges  comprising — 

Discount   on   bonds. . 117,500.00 

Prior  liabilities  of  Municipal  Company 

assumed    32,998.42 

Attorney  Fees   30,000.00 

Interest  on  bonds  of  Edison  Illuminating 

Company,  August  1  to    November    1,    1893    46,800.00 

Cyclone   Expense    65,604.30 

Sundry   charges   and  Expenditures  in   excess 

of  transfers   to   Missouri-Electric   Light   & 

Power  Company  (net) 94,492.22 


$7,497,394.94 
If  there  be  added  the  loss  to  September  12, 
1907,  as  shown  by  the  books  of  the  Com- 
pany        386,678.75 

We  arrive  at  the  total  property  and  deficiency 

of    $7,884,073.69 

Which  was  offset  on  the  liability  side  by — 

Bonds   $3,610,000.00 

Capital   Stock 4,000,000.00 

Net  Current  Liabilities 274,073.69 


$7,884,073.69 


With  reference  to  the  trial  balance  appended  to  this  report 
(see  Exhibit  II-L)  it  may  be  as  well  to  here  note  that  the 
Missouri-Edison  books  were  opened  on  the  basis  of  consolidat- 
ing the  two  trial  balance  sheets  of  the  Edison-Illuminating  and 
Missouri  Electric  Light  &  Power  Companies  (see  Exhibit  II-L) ; 
that  is  to  say  the  simple  plan  was  follow^ed  of  bringing  forward 
all  balances  of  every  character  and  whether  relating  to  the 
property  or  other  assets,  or  to  the  liabilities  and  surplus  from 
the  books  of  the  former  Companies,  with  this  difference  only, 
that  the  plan  of  reorganization  having  provided  for  the  sur- 
render of  the  $3,610,000.00  bonds  of  the  Edison-Illuminating 
Company  in  exchange  for  $1,805,000.00  in  bonds  and  $1,805,- 
000.00  in  stock  of  the  Missouri-Edison  Company  the  outstand- 


35 


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ing  bonds  of  the  Illuminating  Company  of  $3,610,000.00  w^ere 
first  reduced  to  $1,805,000.00,  the  cost  of  property  being  re- 
duced by  a  corresponding  amount;  and  the  capital  stock  of 
$600,000.00  of  the  Missouri  Electric  Light  &  Power  Company 
was  dropped  from  one  side  and  the  franchise  value  of  the 
same  amount  from  the  other. 

MISSOURI-EDISON  ELECTRIC  COMPANY. 

This  Company  was  incorporated  on  October  4,  1897,  and 
acquired  the  property  of  the  Edison-Illuminating  Company 
and  Missouri  Electric  Light  &  Power  Company  by  deed  from 
A.  D.  Brown,  to  whom  the  property  had  been  conveyed  in  pur- 
suance of  the  Plan  and  Agreement  of  Reorganization,  dated 
February  15,  1897.  The  plan  provided  that  the  new  Com- 
pany (the  Missouri-Edison)  should  be  formed  with  an  au- 
thorized issue  of  $4,000,000.00  of  capital  stock,  of  which 
$2,000,000.00  was  to  be  5%  Cumulative  Preferred  and  $2,000,- 
000.00  of  Common.  It  provided  also  for  an  issue  of  $4,000,- 
000.00  5%  30- Year  Gold  Bonds,  the  disposition  of  the  new 
securities  to  be  as  follows: 


Edison 

Illuminating 

Company. 

Outstanding  Stock $4,000,000.00 

To    be    exchanged  for    new 

Common  @  50% 

Outstanding  Bonds 3,610,000  00 

To    be  exchanged    for    new 

Bonds  (50%) 

New  preferred  (50%) 

For  outstanding  bonds  of  the 

Missouri-Electric  Co •      

There    were     reserved 

bonds  in  full 


Missouri 

Elec.  Light  & 

Power  Co. 


Missouri- 
Edison  Elec- 
tric Co. 


$2,000,000.00 


1,805,000.00 
1,805,000.00 


$1,100,000.00 


new 


1,100,000.00 


$7,610,000.00    $1,100,000.00    $6,710,000.00 


Reduction  in  Capitalization $2,000,000.00 

In  our  remarks  on  the  Edison  Illuminating  Company,  it  has 
already  been  explained  that  the  books  of  the  new  Company 
(The  Missouri-Edison)  were  opened  on  the  simple  plan  of 
carrying  forward  thereto  all  balances  as  they  appeared  on  the 
face  of  the  ledgers  of  the  Illuminating  and  Missouri  Electric 


y- 


36 


Appendix   A 


Light  &  Power  Companies,  except  only  that  the  outstanding 
bonds  of  $3,610,000.00  of  the  Illuminating  Company  were 
first  reduced  to  $1,805,000.00,  the  Cost  of  Property  being  re- 
duced by  a  corresponding  amount.  It  is  necessary  to  point 
out  that  in  the  process  of  carrying  forward  the  balances  in  this 
manner  the  Capital  Stock  of  the  Illuminating  Company  of 
$4,000,000.00  was  brought  on  to  the  books  of  the  new  Com- 
pany at  the  same  amount,  the  fact  being  lost  sight  of  that 
there  was  to  be  issued  only  $1,805,000.00  thereof  in  part  ex- 
change for  bonds,  and  in  consequence  the  net  reduction  in  the 
capitalization  was  shown  at  only  $1,805,000.00  instead  of  at 
$2,000,000.00  as  it  should  have  been.  The  difference  of  $195,- 
000.00  of  capital  stock  was  retained  in  the  Treasury  of  the 
new  Company,  though  it  w^as  not  so  recorded  on  the  books. 
When  subsequently  sold,  the  proceeds  were  credited  to  surplus, 
but  strictly  speaking,  should  have  been  applied  to  the  credit 
of  Cost  of  Property.  We  have  not,  however,  undertaken  to 
readjust  this  particular  item,  for  the  reason  that  sundry  items 
of  reorganization  expenses  and  interest  of  nearly  a  correspond- 
ing amount  were  charged  to  surplus,  which  should  perhaps  be 
added  to  the  Investment  for  the  purpose  of  the  present  report, 
and  the  credit  to  Surplus  on  the  other  side  may  therefore  be 
said  to  practically  offset  the  debts  on  the  other. 

Of  the  $1,100,000.00  bonds  reserved  for  exchange  for  the 
underlying  bonds  of  the  Missouri  Electric  Light  &  Power 
Company,  $500,000.00  was  applied  in  retiring  a  like  amount 
•of  First  Mortgage  bonds  of  that  Company.  The  $600,000.00 
Second  Mortgage  bonds  are  still  outstanding  at  the  present  date, 
having  become  First  Mortgage  bonds  by  reason  of  the  retire- 
ment of  the  prior  mortgage. 

The  balance  of  $1,095,000.00  authorized  to  be  issued  of  the 
total  of  $4,000,000.00  were  disposed  of  for  cash  at  par  or  at 
various  discounts  as  follows: 

Missouri  Missouri         Electric 

Edison  First  Second  Total  Discount 

Issued  or  outstanding  at 

beginning $1,805,000.00  $500,000.00  $600,000.00  $2,905,000  00  $ 

Sold  at  par 5,000  00     5,000  00     

Sold  @  96.85 30,000.00     30.000.00  945.00 

Sold  @  95 1,060.000.00      1,060.000.00     53,000.00 

xchanged 500,000.00—500,000.00     

$3,400,000.00      $600,000.00  $4,000,000.00  $53,945.00 


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Appendix   A 


37 


The  discount  of  $53,945.00  above  mentioned,  together  with 
commissions  of  $26,500.00  (being  at  the  rate  of  21/2%  on 
$1,060,000.00  bonds  sold),  was  charged  to  Construction  Ac- 
count. 

At  a  meeting  of  the  directors  on  January  21,  1898,  it  was 
decided  to  exercise  the  option  to  purchase  the  property  of  the 
St.  Louis  Electric  Light  &  Power  Company  in  accordance  with 
an  agreement  entered  into  by  the  Reorganization  Committee 
of  the  Edison  Illuminating  Company,  and  the  purchase  was 
accordingly  consummated,  and  the  purchase  price  of  $250,- 
€00.00  would  appear  to  have  been  paid  in  cash  in  accordance 
with  the  agreement. 

On  November  14,  1902,  mention  is  made  of  the  fact  that  an 
option  had  been  given  to  the  U.  S.  Government  on  the  Com- 
pany's property  at  17th  &  Walnut  Streets  of  about  100  feet  at 
a  price  of  $300.00  per  foot.  This  sale  was  effected  in  accord- 
ance therewith  and  the  proceeds  of  $30,000.00  were  deposited 
with  the  Trustees  under  the  mortgage,  in  whose  possession  the 
amount  remains  at  the  present  time. 

Except  for  the  matters  hereinabove  referred  to,  the  minutes 
relate  for  the  most  part  to  purchase  of  new  machinery  and 
equipment  or  other  matters  of  construction  and  operation 
rather  than  to  financial  transactions  of  more  than  usual  magni- 
tude or  importance  until  the  meeting  of  June  19,  1903,  when 
it  was  voted  to  call  a  meeting  of  the  stockholders  to  act  upon 
the  proposition  to  amalgamate  with  the  Union  Electric  Light 
<fe  Power  Company. 

The  agreement  of  consolidation  was  ratified  in  due  course 
at  meetings  of  directors  and  stockholders  held  on  September 
8  and  9  respectively,  the  agreement  providing  in  substance  that 
the  new  Company  (The  Union  Company)  was  to  issue  its  cap- 
ital stock  to  the  amount  of  $10,000,000.00  in  100,000  shares  of 
$100.00  each,  to  be  distributed  as  follows: 

1  share  of  stock  and  $5.00  cash  for  every  2  shares  of  Pre- 
ferred of  Missouri-Edison  Company. 

1  share  of  stock  and  $5.00  cash  for  every  4  shares  of 
Common. 

1  share  for  every  share  of  Preferred  of  the  Union  Com- 
pany. 


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-( 


38 


Aptendix   a 


1  share  for  every  2  shares  of  Common  of  the  Union  Com- 
pany. 

The  remaining  $2,500,000.00  being  reserved  for  Treasury 
purposes. 

During  the  Company's  existence  between  September,  1897, 
and  December  31,  1903,  the  books  showed  that  there  was  ex- 
pended for  additions,  improvements  or  betterments  charged  to 
Capital  account  an  aggregate  sum  of  $1,681,798.96,  as  is  more 
clearly  brought  out  by  the  comparison  of  the  financial  position 
at  the  close  of  the  period  with  the  corresponding  figures  at  the 
commencement.     The  following  is  the  comparison: 

September  December         Increase  or 

Assets  1897    '  1903  Decrease 

Property  and  Plant $7,816,636.82     $9,498,435.78     $1,681,798.96 

All  other  assets 320,025.28         225,090.01        —94,935.27 

$8,136,662.10    $9,723,525.79     $1,586,863.69 

Liabilities 

Capital  Stock $4,000,000.00  $4,000,000.00      

Bonds 2,905,000.00  4,000,000.00  $1,095,000.00 

Bills  and  Accounts  Payable. .  604,212.88  478.731.32  —125,481.56 

Surplus 627,449.22  1,244,794.47  617,345.25 

Total .• $8,136,662.10    $9,723,525.79     $1,586,863.69 


In  short,  the  funds  for  the  outlays  on  property  and  plant 
were  derived  as  to  $1,095,000.00  from  the  sales  of  bonds  here- 
tofore referred  to,  and  as  to  the  remainder  of  $586,798.96  out 
of  the  surplus  profits  from  operation  (before  making  provisions 
for  depreciation),  the  balance  of  profits  or  surplus  of  $30,546.29 
being  applied  in  the  net  reduction  of  current  liabilities  by  an 
equivalent  amount. 

ST.  LOUIS  ELECTRIC  LIGHT  &  POWER  COMPANY. 

Reference  has  been  made  to  the  purchase  of  the  property  of 
this  Company  by  the  Missouri-Edison  for  the  sum  of  $250,- 
000.00  which  was  apparently  paid  in  cash,  and  some  brief  ref- 
erence to  that  Company  may  be  desired.  The  minute  book 
was  found  to  be  in  existence  for  the  entire  period  of  the  Com« 
pany^s  history,  but  the  ledgers  were  available  for  only  a  por- 


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Appendix   A 


39 


tion  of  that  time,  namely,  for  the  period  from  November  1, 

1891,  to  August  31,  1895,  and  in  any  case  did  not  give  details 
of  the  charges  to  property  account,  which  amounted  to  $132,- 
479.75  at  August  31,  1895. 

The  minutes  disclose  that  the  Company  was  formed  in  1888 
with  a  capital  stock  of  $8,000.00  which  was  issued  to  John  C. 
At  wood  in  consideration  of  his  transfer  of  dynamos,  engines 
and  other  property  in  the  leased  premises  at  304-6-8  Locust 
Street.  At  the  same  time  an  agreement  was  entered  into  with 
D.  W.  Guernsey,  agent  of  the  Sprague  Electric  Railway  and 
Motor  Company  of  New  York,  by  which  he  agreed  to  transfer 
his  rights  under  a  certain  contract  with  the  Sprague  Company 
in  consideration  of  a  payment  to  him  of  $1,800.00  per  year 
until  June,  1893. 

In  1890  the  capital  stock  was  increased  to  $30,000.00;  in 

1892,  to  $75,000.00;  in  1896,  first  to  $200,0.00.00  and  then 
to  $700,000.00.  It  would  appear,  however,  that  only  $450,- 
000.00  was  issued  in  all.  The  successive  increases  from  $30,- 
000.00  to  $450,000.00  were  apparently  all  paid  for  by  stock 
dividends.  In  addition,  certain  cash  dividends  were  declared 
and  paid  from  time  to  time. 

THE  ELECTRIC  LIGHT,  POWER  &  CONDUIT 

COMPANY. 

It  may  be  as  well  to  refer  here  to  another  Company,  which 
is  mentioned  in  the  chart  and  Table  of  Companies,  and  this 
was  the  Electric  Light,  Power  &  Conduit  Company  which 
according  to  the  minute  book  thereof  was  formed  on  Septem- 
ber 28,  1896,  with  a  capital  stock  of  $50,000.00. 

In  December,  1896,  it  was  voted  to  increase  the  stock  to 
$600,000.00  and  to  issue  bonds  of  $600,000.00,  but  so  far  as  we 
are  aware,  these  resolutions  were  never  carried  into  effect  and 
the  Company  conducted  no  further  business.  It  would  appear, 
therefore,  that  the  formation  of  the  Company  was  the  initiation 
of  a  strategic  plan,  the  continuance  or  completion  of  which  was 
probably  rendered  unnecessary  by  subsequent  developments. 

St.  Louis,  Mo.,  November  15,   1909. 


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APPENDIX    B 


ANALYSIS 

OF 

Rate  Calculations 


FOR 


Electric   Light  and   Power 


REPORT  TO 


ST.  LOUIS  PUBLIC  SERVICE 

COMMISSION 


BY 

James  E.  Allison, 

Commissioner  and  Chief  Engineer 


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A  l*  !•  K  N  I)  I  X     H 


Messrs.  Joseph  L.  Hornsby,  Chairman, 

James  A.  Waterworth, 

James  E.  Allison, 

Saint  Louis  Public  Service  Commission. 

Gentlemen  : — 

In  pursuance  of  my  duties  as  Chief  Engineer  of  this  Com- 
mission, I  herewith  respectfully  submit  as  a  report,  an  anal- 
ysis of  the  theories  and  principles  of  Electric  Light  and  Power 
rates. 

Parts  I,  II  and  IV  of  the  report  are  taken  up  in  setting  out 
the  generally  accepted  method  of  calculating  Cost  to  Serve  rates 
by  Connected  Load  or  Maximum  Demand.  The  remaining 
parts  of  the  report  are  devoted  to  an  analysis  of  these  and 
other  methods  and  theories  of  rate  calculation. 

Investigation  into  the  rates  of  a  number  of  large  compa- 
nies show^s  that  while  Connected  Load  or  Maximum  Demand 
are  generally  used  as  the  most  important  basic  factors  in  the 
rate,  yet  there  seems  to  be  no  very  serious  effort  to  apply  rates 
in  w^hich  there  is  even  an  attempt  to  follow  the  Cost  to  Serve 
principle. 

In  making  this  report  the  writer  does  not  present  any 
scheme  of  rates,  but  merely  attempts  to  analyze  underlying 
principles  and  to  lay  before  the  Commission  some  of  the  fal- 
lacies of  accepted  methods. 

Respectfully  submitted, 

James  E.  Allison, 
Commissioner  and  Chief  Engineer, 

August  25th,  1910. 


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A  p  r  E  N  I)  I  X    B 


"Individual  Cost  to  Serve''  Rates 

PART  1. 

In  attempting  to  devise  a  rate  which  will  cause  each  indi- 
vidual consumer  to  pay  in  direct  proportion  to  the  cost  of  ren- 
dering him  his  required  service,  the  entire  cost  can  be  divided 
into  three  elements. 

1st:  The  Costumer's  Charge,  which  is  that  element  of  cost 
caused  by  the  mere  connection  of  the  consumer,  irrespective 
of  his  use  of  current.  Costs  assignable  to  this  element  being 
such  as  the  cost  of  reading  the  meter,  making  the  bills,  keep- 
ing the  accounts,  etc.,  etc. ;  the  charge  being  the  same  for  each 
individual  consumer. 

2nd:  The  Manufacturing  Charge,  or  the  cost  of  manu- 
facturing and  delivering  the  current  irrespective  of  the  invest- 
ment. 

3rd:  The  Investment  Charge,  consisting  of  the  return  on 
the  investment,  the  taxes  and  insurance,  the  depreciation  and 
perhaps  other  minor  charges.* 

The  just  apportionment  between  the  consumers,  of  charges 
under  the  first  two  elements  is  only  a  matter  of  correct  account- 
ing, but  when  we  come  to  consider  the  third  element,  we  are 
confronted  by  the  problem  of  determining  the  share  of  the 
investment  caused  by  each  individual  consumer  and  his  conse- 
quent proportional  responsibility  for  the  amount  of  income 
necessary  to  pay  the  Investment  Charges. 

The  demand  for  current  upon  a  plant  doing  a  general  busi- 
ness will  vary  greatly  during  the  year  or  during  the  several 
years  for  which  the  plant  is  designed  to  render  service,  and 
the  investment  must  be  made  to  provide  a  plant  adequate  to 
produce  the  greatest  amount  of  current  which  may  be 
demanded  of  it  at  any. one  instant  during  the  period  for  which 
it  is  designed.     This  greatest  demand,  during  the  term  for 


*  These  charges  may  be  made  to  include  such  items  of  expense  as  are 
chargeable  to  demand  or  capacity. 


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4  AppendixB 

which  the  income  is  being  calculated,  may  be  called  the 
Investment  Peak. 

For  rate  calculating  purposes,  it  is  assumed  that  there  is  a 
direct  relation  between  the  Investment  Peak  and  the  invest- 
ment, and  consequently  between  the  greatest  Instantaneous 
Demand  and  the  investment,  and  that  the  Investment  Peak  or 
the  greatest  Instantaneous  Demand  is  a  direct  measurement  in 
kilowatts,  of  the  investment  in  dollars.  It  is  generally 
assumed  to  follow  then,  that  the  part  of  the  total  Investment 
Charge  assignable  to  each  consumer  is  in  direct  proportion  to 
the  number  of  K.  W.'s  which  he  demands  on  the  Investment 
Peak,  or  at  the  greatest  Instantaneous  Demand.  In  other  words, 
his  Investment  Charge  is  measured  by  his  Peak  Responsibility. 

As  it  is  manifestly  impossible  to  obtain  an  actual  measure- 
ment of  each  consumer's  K.  W.  demand  at  the  instant  of  the 
Investment  Peak,  the  problem  presents  itself  of  devising  some 
means  of  determining  approximately  the  Peak  Responsibility 
of  each  consumer.  From  that  we  can  obtain  his  Individual 
Investment  Charge,  which  is  to  be  reduced  to  a  K.  W.  H.  rate 
or  left  as  a  flat  charge. 

Two  methods  have  been  used  in  attempting  to  solve  this  prob- 
lem. In  one  of  these  it  is  assumed  that  the  Maximum  Demand 
of  the  consumer  is  a  measure  of  his  Peak  Responsibility.  In 
the  other  it  is  assumed  that  his  Connected  Load  is  the  correct 
measure. 

Both  of  them  are  open  to  serious  objections,  as  shown  in  the 
following  analyses  : 

PART  II. 

Analysis  of  Maximum  Demand  Method  of  ' 

Rate  Calculation. 

Step  1. 

First:  We  assume  that  there  is  a  direct  relationship  be- 
tween the  Peak  and  the  investment. 

Step  2. 

Next,  the  proper  yearly  return  on  the  investment,  plus  taxes 
and  insurance,  plus  proper  yearly  depreciation  charge,  is 
•divided  by  the  Investment  Peak  Load  multiplied  by  the  decimal 


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AppfndixB  5 

of  efficiency  of  .distribution.  The  result  of  this  process  will  be 
the  yearly  amount  of  Investment  Charge  assignable  to  each 
K.  W.  of  Instantaneous  Demand.  (Instantaneous  Demand 
here  means  that  portion  of  the  Peak  actually  delivered  to  the 
consumers.) 

Step  3. 

At  this  point  we  assume  that  there  is  a  direct  relationship 
between  each  consumer's  Maximum  Demand  and  his  share  of 
the  Instantaneous  Demand  or  his  Peak  Responsibility,  but 
recognizing  that  the  sum  of  the  Maximum  Demands  of  the 
consumers  is  far  in  excess  of  the  Instantaneous  Demand,  we 
use  a  diversity  factor,  assuming  that  only  a  portion  of  the  con- 
sumer's Maximum  Demand  comes  on  the  Peak.  Having  used 
our  diversity  factor,  we  have  the  amount  of  yearly  Investment 
Charge  assignable  to  each  K.  W.  of  Maximum  Demand  of 
each  consumer. 

Step  4. 

It  now  becomes  necessary,  in  order  to  fix  a  consumer's  yearly 
Investment  Charge,  to  determine  his  Maximum  Demand.  Not 
having  maximum  demand  meters,  we  here  select,  from  experi- 
mental data  collected  from  the  use  of  demand  meters  by  sev- 
eral different  companies  in  other  cities,  a  percentage  showing 
the  average  ratio  between  ^e  Connected  Load  and  the  Maxi- 
mum Demand  of  consumers  using  current  for  the  same  pur- 
pose as  the  consumer  for  whom  we  are  trying  to  fix  a  rate. 

Step  5. 

By  dividing  the  yearly  Investment  Charge,  as  arrived  at  in 
Step  3,  by  12  we  have  the  monthly  Investment  Charge  per 
K.  W.  of  Maximum  Demand,  and  by  multiplying  this  figure 
by  the  Individual  Maximum  Demand,  as  arrived  at  in  Step 
4,  we  have  the  monthly  Investment  Charge  of  each  individual 
consumer. 

Step  6. 

Having  the  monthly  Individual  Investment  Charge  for  the 
consumer,  the  next  problem  is  to  work  this  charge  into  the 
consumer's  bill.  There  are  a  number  of  methods  in  use  for 
doing  this.     The  most  obvious,  and  perhaps  the  most  correct, 


6 


Appendix    B 


\\ 


is  to  make  a  flat  charge  per  K.  W.  of  Maximum  Demand.  Gen- 
erally, however,  this  method  is  undesirable  on  account  of  its 
unpopularity  and  various  other  schemes  are  adopted  for  work- 
ing the  charge  into  a  rate  per  K.  W.  H. 

A  typical  method  consists  in  assuming  that  a  K.  W.  H.  con- 
sumption equal  to  a  certain  number  of  hours'  use  of  the  Max- 
imum Demand  (generally  30  or  a  multiple  thereof)  should, 
in  a  month,  at  the  base  rate  to  be  established,  care  for  the  Cus- 
tomer's Charge,  the  Manufacturing  Charge  for  current  con- 
sumed in  the  assigned  hours'  use  of  the  Maximum  Demand, 
and  the  monthly  Investment  Charge  assigned  to  the  cuMomer. 
The  result  of  this  last  calculation,  assuming  that  our  process 
is  correct,  gives  us  a  rate  which  should  properly  take  care  of 
all  charges,  provided  the  consumer  used  more  than  the  num- 
ber of  hours  of  his  Maximum  Demand  which  we  arbitrarily 
assign.  For  each  K.  W.  H.  of  additional  current  in  excess  of 
the  assigned  hours'  use  of  the  Maximum  Demand,  we  make  an 
additional  or  secondary  charge  equal  only  to  the  Manufactur- 
ing Charge.  All  other  costs  having  been  covered  in  the  appli- 
■cation  of  the  base  rate  to  the  assigned  hours'  use  of  the  Maxi- 
mum Demand.  (In  practice,  the  ;8econdary  charge  is  gen- 
erally made  to  assume  part  of  the  burden  of  Customer's  Charge 
and  Investment  Charge.) 

For  convenience  in  discussion  and  analysis,  let  us  reduce  the 
foregoing  steps  in  our  calculation  to  algebraic  formulae. 


Appendix   B 


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Let 
R 
T 
D 
P 
E= 
PE  = 
C= 

F= 
H= 


=  Proper  Return  on  Investment  for  year. 

=  Taxes  and  Insurance  per  year. 

=  Proper  Depreciation  Charge  per  year. 

=  Investment  Peak. 

=  Decimal  of  Efficiency  of  Distribution. 

=  Instantaneous  Demand. 

=  Investment  Charge  per  year  per  K.  W.  of  Instantaneous 
Demand. 

=  Diversity  Factor. 

=  Investment  Charge  per   year  per  K.  W.  of  Individual 
Maximum  Demand. 


I=^= Investment  Charge  per  month  per  K.  W.  of  Indi- 
-    vidual  Maximum  Demand. 

K  =  Individual  Connected  Load. 

N= Decimal  Ratio  of  Class  Maximum  Demand  to  Connected 
Load. 

KN= Individual  Maximum  Demand. 

KNI  =  Monthly  Individual  Investment  Charge. 

A  =  Monthly  Individual  Customer's  Charge. 

B= Manufacturing  Charge  per  K.  W.  H. 

L=Cost  Lamp  Renewals  per  K.  W.  H. 

M  =  Assumed  standard  number  of  hours  use  of  Individual 
Maximum  Demand  per  month. 

S  =  Individual  K.  W.  H.  per  month. 

X  =  Base  Rate  for  K.  N.  M.  or  Primary  Rate. 

X'  =  Rate  per  K.  W.  H.  which  will  produce  proper  amount 
for  sum  of  all  charges. 

Y= Customer's  Bill. 


8 


Appendix   B 


Step  1. 

Assumed  relation  of  Peak  to  Investment. 

Step  2  is  represented  by 
R+T+D 


P.E. 


=  C 


Step  3  is  represented  by 
C 


F 


=  H 


F  = 


Sum  of  Consumer's  K.N. 

re; 


Step  4  is  represented  by 
K.N.  =  K.N. 

Step  5  is  represented  by 

1=1 

12 

* 

Step  6  is  represented  by 

K.N.M.X.  =  A  +  K.N.M.B.  +  K.N.I. 

then, 

A+K.N.M.B  +  K.N.I. 
K.N.M. 

or  where  lamps  are  furnished 

A  +  K.N.M.  (B  +  L.)  + K.N.I. 


X= 


K.N.M. 


then, 


Y=X.K.N.M.  +  B  (S-K.N.M.) 

where  lamps  are  furnished, 

Y=X.K.N.M.  +  (B+L.)  (S-K.N.M.) 

X'  cannot  be  calculated,  as  we  have  no  applicable  hour 
factor. 


„  ♦. 


Appendix    B 


9 


PART  III. 

The  preceding  calculation  plainly  divides  itself  into  two  main 
problems.  First:  The  determination  of  the  amount  of  the 
Investment  Charge  which  should  be  assigned  to  each  individual 
consumer.     (See  Steps  1,  2,  3,  4,  and  5.) 

Second :  The  distribution  of  this  charge  and  the  Customer's 
Charge  by  causing  them  to  be  carried  by  a  certain  portion  of 
the  K.  W.  H.  used  by  the  consumer.     (Step  6.) 

Let  us  first  analyze  the  foregoing  method  of  solving  the  sec- 
ond problem,  i.  e.  the  distribution  of  the  Investment  Charge 
and  the  Customer's  Charge,  in  accordance  with  an  arbitrary 
standard  of  K.  W.  H.  consumption,  as  represented  by  factor 
K.  N.  M. 

The  most  obvious  objection  to  this  process  is,  that  whenever 
a  consumer  uses  in  a  month  less  than  M.  times  his  Maximum 
Demand  he  escapes  a  part  of  his  rightful  assignment  of  Invest- 
ment Charge  and  Customer's  Charge. 

Therefore,  it  becomes  necessary  either  to  make  M.  so  small 
as  to  produce  practically  a  flat  charge  to  cover  the  Investment 
Charge  and  Customer's  Charge,  or  by  mere  guessing,  to  raise 
the  whole  rate  so  as  to  talge  care  of  that  portion  of  the  Invest- 
ment and  Customer's  Charge  which  certain  consumers  may 
escape. 

Another  evident  objection  is,  that  two  consumers  having 
the  same  Maximum  Demand  and  using  approximately  the. 
same  K.  W.  H.  in  the  year  may  be  charged  substantially  dif- 
ferent prices  per  K.  W.  H. 

We  will  suppose  that  A.  uses  each  month  nearly  M.  times 
his  Maximum  Demand,  while  B.  will  use  very  little  in  some 
months  and  very  much  in  excess  of  M.  times  his  Maximum 
Demand  in  other  months.  Both,  however,  using  approximately 
the  same  K.  W.  H.  in  a  year. 

It  is  plain  that  B.  will  receive  the  benefit  of  discount  in  sec- 
ondary charges  for  a  part  of  his  K.  W.  H.'s,  while  A.  will 
receive  no  such  benefit.  This  result  places  a  premium  on  irreg- 
ular use  of  the  current  and  causes  a  manifest  injustice  in  the 
rate. 


; 


10 


Appendix   B 


It  must  not  be  assumed  that  the  two  preceding  objections 
are  merely  possible  instances. 

The  examination  of  the  accounts  of  any  good  sized  electric 
company  will  show  that  they  apply  to  a  very  large  number 
of  consumers,  and  will  materially  disturb  or  perhaps  render 
entirely  inaccurate,  any  ''Cost  to  Serve"  rate  calculations  using 
the  same  or  a  similar  method  of  distributing  the  charges  into 
the  bill. 

In  analyzing  the  first  problem  in  our  calculation,  i.  e.,  the 
assignment  of  the  correct  Individual  Investment  Charge  to  each 
consumer,  we  find  that  we  have  adopted  the  consumer's  Indi- 
vidual Maximum  Demand  as  the  unit  for  measuring  his  Peak 
Responsibility. 

Without  demand  meters  we  have  no  way  of  determining 
what  his  actual  Individual  Maximum  Demand  is,  so  as  a  make- 
shift, we  select  a  factor  N.  with  which  to  evolve  his  individual 
Maximum  Demand  from  his  Connected  Load. 

This  factor  N.  is  a  supposed  average  ratio  between  the  Con- 
nected Loads  and  the  Maximum  Demands  of  a  whole  class  of 
consumers  making  a  supposed  similar  use  of  current  to  that 
of  the  particular  consumer  whose  rate  we  are  trying  to  deter- 
mine. N.  has  been  deduced  from  experiments  made  with 
demand  meters,  showing,  for  instance,  that  the  average  ratio 
between  the  Connected  Load  and  the  Maximum  Demand  of 
residences  or  butcher  shops  or  sausage  grinders  in  a  certain  city, 
is  such  and  such  a  figure. 

Unfortunately  for  our  confidence  in  this  experimental  data, 
the  published  results  from  various  different  cities  show  such  a 
variation  in  the  derived  factors  for  the  same  class  of  consumers, 
that  the  use  of  one  of  them  in  such  a  serious  matter  as  a  rate 
calculation  seems  an  absurdity.  In  the  residence  class  for 
instance,  the  published  results  vary  from  stating  that  the  aver- 
age Maximum  Demand  is  21%  of  the  Connected  Load,  to 
placing  it  as  high  tis  50%  of  the  Connected  Load. 

Such  a  margin  of  error  in  the  important  factor  N.  of  our 
formula,  must  render  the  results  of  any  calculation  in  which 
it  enters  absolutely  valueless,  even  if  all  other  factors  and 
assumptions  were  correct. 

As  an  additional  absurdity,  w^e  may  see  that  although  we  are 
using  our  factor  N.  to  determine  the  Individual  Maximum  De- 
mands by  multiplying  it  with  the  individual  factor  K.,  yet  N. 


> 


i 


Appendix   B 


11 


itself,  even  if  correctly  derived,  only  represents  the  factor  of  a 
class  average,  and  is  in  no  way  applicable  to  calculations  to 
produce  the  Individual  Maximum  Demand. 

Let  us  take  an  example  say  in  the  residence  class.  Assume 
that  the  actual  measured  Maximum  Demand  of  one  consumer 
proves  to  be  85%  of  his  Connected  Load,  of  another  15%.  It 
is  seen  that  the  average  is  50%,  which  when  applied  to  either 
of  the  consumers  individually,  in  no  way  considers  his  real 
Maximum  Demand. 

The  assignment  of  a  certain  value  to  N.  in  accordance  with 
the  occupation  of  the  user  (making  residences  a  class  by  them- 
selves) is  in  itself  an  entirely  illogical  proceeding. 

These  classes  are  not  divided  in  accordance  with  any  even 
probable  ratio  between  the  Individual  Maximum  Demand  and 
Connected  Load.  The  classification  is  really  made  as  to  the 
probable  hours  in  the  day  during  which  they  use  current,  and 
the  probable  time  of  their  Peak.  This  being  the  result  of  simi- 
larity of  occupation. 

It  is  evident  that  when  we  use  N.  we  are  in  no  way  obtain- 
ing the  Maximum  Demand  of  the  individual,  nor  in  fact  any 
factor  pertaining  to  him  individually.  Yet  we  are  using  N.  to 
determine  what  part  of  the  investijient  he  shall  be  responsible 
for. 

It  may  also  be  noted  here  that  we  are  using  another  factor 
F.  which  is  an  average  figure  computed  from  the  Instantaneous 
Demand  of  the  whole  body  of  the  consumers,  and  is  not  appli- 
cable to  obtaining  a  correct  result,  either  for  a  class  of  con- 
sumers or  for  an  individual  consumer. 

Having  labored  to  prove  that  the  preceding  method  of  deter- 
mining the  Individual  Maximum  Demand  is  incorrect,  it  might 
be  well  to  now  inquire  of  what  use  it  would  be  even  had  we 
obtained  accurately  the  actual  Maximum  Demand  of  each  con- 
sumer. 

We  are  assuming  in  this  method  of  calculation  that  the  Indi- 
vidual Maximum  Demand  is  the  unit  of  measurement  of  the 
actual  Peak  Responsibility  of  each  consumer. 

Is  there  any  natural  ratio  between  the  consumer's  Individual 
Maximum  Demand  and  the  K.  W.'s  he  happens  to  be  using  at 
the  Investment  Peak,  i.  e.  his  Peak  Responsibility?  There  is 
actually  none  whatever,  nor  in  this  method  of  calculation  has 


-.X. 


I 


jl 


w 


12 


Appendix   B 


there  been  any  factor  developed  which  establishes  any  ratio  or 
relation  between  the  two. 

To  illustrate  the  absurdity  of  the  whole  proposition,  let  us 
assume  in  a  given  plant  that  the  Investment  Peak  occurs  at 
5  p.  m.  on  the  10th  of  December.  Let  us  also  assume  that  a 
correct  diversity  factor  of  3  has  been  deduced.  Now,  if  our 
assumption  that  the  consumer's  Maximum  Demands  are  the 
measure  of  the  Peak  Responsibility  is  correct,  then  at  5  p.  m^ 
on  the  10th  of  December,  each  individual  consumer  connected 
with  the  plant  will  be  using  K.  W.'s  equal  to  just  one-third  of 
the  greatest  amount  which  he  individually  has  used  at  any  one 
instant  within  a  period  of  time  not  definitely  fixed.  It  is  not 
possible  that  this  can  be  even  approximately  true,  or  that  there 
can  be  established,  even  approximately,  by  this  method,  any 
ratio  between  Individual  Peak  Responsibility  and  the  consum- 
er's Individual  Maximum  Demand. 

If,  then,  we  do  not  question  our  theory  that  the  Peak  is  the 
correct  K.  W.  measure  of  the  investment,  and  each  consumer's 
Peak  Responsibility  is  the  measure  of  his  Investment  Charge, 
we  must  conclude  that  Maximum  Demand  is  not  available  as 
a  factor  to  enter  into  rates  purporting  to  differentiate  in  accord- 
ance with  the  "Cost  to  Serve." 


/ 


Y 


I 


Appendix   B 


13 


PART  IV. 

Analysis  of  Connected  Load  Method  of 
Rate  Calculation.  ^ 

The  use  of  the  Connected  Load  of  the  consumer  as  a  measure 
of  his  Peak  Responsibility  shows  some  mathematical  advan- 
tages over  the  Maximum  Demand.  Its  numerical  value  can 
be  accurately  established.  It  is  not  the  measure  of  an  instant, 
and  we  can  be  sure  that  it  is  in  force  as  a  factor  at  the  time 
of  the  Investment  Peak. 

Using  the  same  letters  as  in  our  analysis  of  the  Maximum 
Demand  method,  we  would  arrive  at  the  formulae: 


R+T+D 
P.E. 


=  C 


F= 


Sum  of  Connected  Loads 


P.E. 


F 


{ 


y 


} 


^ 


K=K 


12 


K.M.X.=A+K.M.B.  +  K.L 


X= 


A+K.M.B.  +  K.L 
K.M. 


With  Lamps 

A+K.M.(B-fL)4-K.L 


X= 


K.M. 


Y=X.K.M.  +  B.(S-K.M.) 


'     i 


r 


ii 


iHI 


14 


Appendix   B 


With  Lamps. 

Y=X.K.M.  +  (B  +  L)  (S-K.M.) 

X'  cannot  be  calculated,  as  we  have  no  applicable  hour  factor. 

Here  by  the  elimination  of  the  unreliable  factor  N.  we  find 
that  all  the  factors  can  be  known  accurately,  but  this  is  merely 
a  mathematical  advantage  over  the  Maximum  Demand  method. 

The  individual  consumer  neither  causes  the  investment  nor 
uses  the  investment  in  accordance  with  any  law  of  proportion 
between  his  use  or  demand  and  his  Connected  Load. 

There  are  so  many  and  various  reasons  governing  his  instal- 
lation which  bear  no  relation  to  his  demand  or  use  of  current, 
that  there  can  be  no  fixed  ratio  between  his  Connected  Load 
and  his  Investment  Kesponsibility. 

Take  for  instance,  residence  lighting.  The  consumer  does 
not  install  lamps  with  a  view  to  the  gross  amount  of  light  he 
will  use,  either  at  one  time  or  in  the  aggregate,  but  in  accord- 
ance with  the  size  and  luxuriousness  of  his  dwelling.  His 
consumption  and  demand  for  current  depends  on  the  size  of 
his  family,  his  personal  habits  and  his  personal  disposition  to 
economize  or  be  extravagant. 

In  business  lighting,  the  ratio  between  use  or  demand  and 
the  Individual  Connected  Load,  is  governed  by  so  great  a  num: 
ber  of  circumstances  that  rates  based  upon  this  ratio  would,  to 
even  approach  justice,  have  to  be  varied  to  meet  an  almost  infi- 
nite number  of  classes ;  entirely  too  great  a  number  to  be  prac- 
tical, even  if  the  proper  data  could  be  obtained. 

The  power  business  will  probably  come  closer  than  the  other 
two  classes  to  having  a  fixed  relation  between  use  or  demand 
and  the  Individual  Connected  Load.  But  even  here,  we  find 
wide  differences  due  to  over  or  under  equipment  of  motors  and 
various  other  individual  circumstances. 

It  then  appears  plainly  evident  that  there  can  be  no  fixed 
relation  between  the  consumer's  Individual  Connected  Load  and 
his  Individual  Peak  Kesponsibility  or  Investment  Responsi- 
bility, consequently  our  use  of  K.  as  a  measure  of  his  Invest- 
ment Charge  is  entirely  illogical,  and  our  whole  calculation  is 
based  on  an  erroneous  assumption. 

The  use  of  the  factor  M.  has  also  all  the  disadvantages  it 
had  in  the  Maximum  Demand  method. 


i 


i 


A 


\ 


I 


i 


Appendix    \^ 


15 


PART  V. 

In  the  preceding  calculation  the  factors  P.  E.  F.  and  C.  were 
used  by  the  writer  because  it  seems  customary  to  do  so.  The 
theory  being  that  the  Peak  is  the  correct  K.  W.  measure  of  the 
Investment  and  each  consumer's  Peak  Responsibility,  the  meas- 
ure of  his  Investment  Charge. 

A  glance  at  the  equations,  however,  shows  that  P.  E.  F.  and 
C.  are  entirely  superfluous  factors  in  arriving  at  the  value  of  H. 
either  bv  the  Maximum  Demand  or  the  Connected  Load 
method. 

In  the  Maximum  Demand  formulae 

^     R+T+D     j^     SumK.N.       ,  _.      C 
C  =  — ^^::^ —  and  F=  — ^r^^ —  and  H  = 


P.E. 


P.E. 


F 


Then  H  = 


/Sum  K.N.\ 


/R+T+ 
\^     P.E. 


R+T+D 
Sum  K.N. 


And  in  the  Connected  Load  method 

^     R+T+D      ,_,     SumK      .„       C 
C  =  — ^^^^ —  and  F= and  H.  = 


P.E. 


P.E. 


F 


Then  H  = 


/R+T+D\ 


(■ 


SumK. 
P.E. 


R+T+D 
SumK. 


The  result  of  the  elimination  shows  that  while  the  Peak  is 
the  basis  of  the  theory  and  the  Peak  Responsibility  a  resulting 
theoretical  factor,  in  the  attempt  to  bring  in  Maximum  Demand 
and  Connected  Load  as  factors,  neither  the  Peak  nor  the  Peak 
Responsibility  remain  necessary  to  the  calculation.     In  fact  on 


16 


Appendix   B 


account  of  the  functions  of  the  Diversity  Factor  (F),  the  Peak 
has  no  value  whatever  in  the  calculation. 

What  these  methods  really  do  is  to  assume  flatly  either  that 
the  Individual  Connected  Load  is  the  correct  measure  of  the 
Individual  Investment  Responsibility,  and  that  tlio  sum  of  the 
Connected  Loads  is  the  measure  of  tlic  whole  investment,  or 
that  the  Individual  Maximum  Demand  is  the  measure  of  the 
Individual  Investment  Responsibility,  and  the  sum  of  the  Max- 
imum Demands  is  the  measure  of  the  whole  investment. 

It  is  evident  from  page  14,  that  to  distribute  the  Investment 
Charges  among  the  consumers  in  proportion  to  their  individual 
Connected  Loads  is,  on  the  face  of  it,  a  manifest  injustice,  and 
that  Connected  Load  cannot  be  taken  as  a  measure  of  Indi- 
vidual Investment  Responsibility,  nor  can  the  sum  of  the  Con- 
nected Loads,  therefore,  be  taken  as  a  measure  of  the  invest- 
ment. 

As  for  the  use  of  a  Maximum  Demand  deduced  by  the  use 
of  N.  this  is  shown  to  be  incorrect  to  absurdity,  for  N.  in  no 
way  gives  us  even  an  approximation  of  the  true  Individual 
Maximum  Demands.      (See  pages  10  and  11.) 

The  Individual  Connected  Load  and  the  calculated  Maximum 
Demand  (K.  N.)  being  eliminated  as  unfit  factors,  there  remains 
then  to  be  considered  only  the  use  of  the  true  measured  Indi- 
vidual Maximum  Demand  as  the  measure  of  the  Individual 
Investment  Responsibility  and  the  sum  of  these  Maxinuim 
Dcniands  as  the  measure  of  the  whole  investment. 

We  have,  however,  the  plain  and  simple  fact  tliat  the  invest- 
ment is  made  for  the  express  purpose  of  producing  a  i)lant 
designed  to  meet  a  certain  demand  upon  it,  namely,  the 
Investment  Peak,  and  leaving  out  of  account  the  very  disturb- 
ing element  of  the  distance  Factor  in  the  distribution  equip- 
ment, which  will  be  treated  later  in  this  paper,  it  is  evident 
that  the  investment  in  a  given  plant  wdll  vary  in  approximately 
direct  ratio  (making  proper  apportionment  of  certain  fixed 
expenditures,  see  page  30)  to  the  height  of  the  Investment 
Peak,  and  that  the  Investment  Peak  is  therefore  the  most 
correct  K.  W.  measure  of  the  investment  obtainable.  Grant- 
ing this,  it  follows  that  if  the  sum  of  the  true  Maximum  De- 
mands of  the  individual  consumers  is  a  proper  measure  of  the 
investment,  it  must  vary  at  least  approximately,  as  the  Invest- 
ment Peak  varies. 


•  m* 


Appendix  B 


17 


Now,  the  sum  of  Maximum  Demands  occurring  at  differ- 
ent, possibly  widely  different  times,  may  vary  almost  indefi- 
nitely without  affecting  the  Peak  demand  upon  the  plant  in 
any  ratio  to  such  variations.  In  fact,  it  is  entirely  possible, 
oven  probable,  that  on  account  of  the  variation  in  the  time  of 
the  occurrence  of  Individual  Maximum  Demands,  the  sum  of 
these  demands  might  increase  while  the  Peak  load  would 
actually  decrease  or  vice  versa,  showing  conclusively  that  there 
can  be  no  fixed  relation  between  Peak  and  sum  of  Maximum 
Demands. 

Any  study  of  the  facts  and  data  of  electric  service  make  it 
plainly  evident  that  the  Maximum  Demand  of  the  individual 
consumer  bears  no  fixed  relation  to  his  demand  at  the  time 
of  the  Peak,  and  therefore  no  relation  to  his  individual 
Peak  Responsibility  or  share  in  causing  the  investment.  Nor 
can  there  be  any  relation  established  between  his  individual 
Maximum  Demand  and  his  use  of  the  investment  as  measured 
by  his  K.  W.  H.  consumption. 

As  the  result  of  the  foregoing  analyses,  we  must  conclude  that 
neither  the  Connected  Load  nor  the  Maximum  Demand  can 
be  correct  factors  in  calculating  rates  which  pretend  to  differ- 
entiate in  accordance  with  the  cost  to  serve,  and  considering 
the  elements  of  error  entering  into  the  calculation,  we  cannot 
escape  the  further  conclusion  that  such  methods  or  formulae 
purporting  to  establish,  even  approximately,  the  cost  to  serve 
tlio  individual  must  tend  to  mislead  both  the  managers  of 
•electric  companies  and  the  public. 


i 


t 


I 


18 


Appendix    B 


PART  VI. 

In  the  tlicory  of  the  foregoing  methods  of  calculation,  we 
have  the  primary  assumption  that  the  Investment  Peak  is  tlio 
K.  W.  measurement  of  the  investment  in  dollars.  This  seems 
logical  and  not  subject  to  attack  (if  we  neglect  the  distance 
factor) . 

But  we  next  assume  that  each  consumer  should  pay  Invest- 
ment Charges  in  proportion  to  the  K.  AV/s  which  he  demands 
at  the  instant  of  the  Investment  Peak,  or  according  to  his 
Peak  Responsibility,  leaving  entirely  out  of  account  the  essen- 
tial element  of  the  time  during  which  he  uses  a  portion  of  the 
investment  in  off-peak  hours.  In  other  words,  his  share  in 
causing  the  investment  is  assumed  to  be  the  sole  measure  of 
his  investment  charges.  Now,  is  it  not  logical  and  fair  to 
assume  that  his  use  of  the  investment  is  equally  a  factor  in 
determining   his   Investment   Charges? 

The  omission  of  the  time  factor  or  use  of  the  investment  by 
the  individual,  not  only  renders  a  correct  solution  of  the  prob- 
lem impossible,  but  it  goes  against  all  established  and  tried 
theories  of  cost  accounting,  opposes  fundamental  commercial 
principles  and  attempts  to  place  the  electric  business  in  a 
unique  class,  for  which  there  is  no  adequate  reason  or  justifi- 
cation. 

AVe  have  assumed  that  the  K.  W.'s  which  occur  on  the 
Investment  Peak  sliould  bear  all  of  the  charges  for  that  invest- 
ment, and  that  the  K.  AV.'s  which  occur  off  the  Peak  should 
go  entirely  free  of  Investment  Charges. 

If  these  Peak  K.  W.'s  were  persons,  would  they  pay  all  the 
Investment  Charges  and  then  allow  their  investment  to  be  used 
free  by  the  off-peak  K.  W.'s?  Certainly  not.  And  they  are 
persons  in  the  sense  that  each  one  of  them  traces  back  to  a 
consumer. 

Is  it  not  proper,  even  if  the  Peak  K.  W.'s  have  caused  the 
investment,  that  the  off-peak  K.  W.'s  pay  proportionately  for 
their  use  of  the  Investment? 

As  the  multiplicity  of  Instantaneous  K.  W.'s  is  measured  by 
the  hour,  it  is  seen  that  if  the  off-peak  K.  W.'s  are  taken  into 
account,  as  well  as  the  Peak  K.  W.'s,  the  Investment  Charge 


Appendix   B 


19 


'I 


will  spread  itself  evenly  into  a  K.  W.  H.  charge,  making  each 
K.  W.  H.  equally  responsible  for  its  share  in  the  investment. 
Let  us  illustrate  this  by  the  diagram  as  shown  on  Plate  A. 
The  diagram  is  supposed  to  represent  a  station  load  curve,  vary- 
ing the  load  at  the  hour  periods.    The  results  would  be  the 


16. 


d 


■^ 

V 


II 


r/a/e  /I 


^ 


7 


d. 


£. 


± 


I 


.?S  .9  3  3  3 


5.. 


^ 


Ul 


L2. 


lA 


Id, 


.. 


6  6  7  8  9/01/ /^  /  £  J  >^5  6  IS  9/0// /£  /  2  3-^ 

Ay/i^M  Noon. 

same  if  the  variations  occurred  every  second  or  less,  but  it 
would  not  offer  quite  so  clear  an  illustration  of  the  priniciple 
involved. 

The  diagram  is  made  to  represent  only  one  day,  while  of 
course  the  real  curve  would  extend  over  the  entire  year.  But 
this  also  would  make  no  difference  in  the  result  of  the  illustra- 
tion. 


i 

f 


20 


Appendix   B 


In  the  diagram  each  square  is  supposed  to  represent  a  K.  W. 
H.,  the  vertical  ordinates  of  the  curve  being  the  measure  of  the 
K.  W.'s. 

Introducing  the  time  element,  wc  will  assume  that  the  Peak 
column  (A)  is  nil  the  load  there  is,  then  of  coui-so  the  total 
Investment  Charge  must  be  borne  by  the  K.  W.  ll.'s  in  that 
column.  In  this  instance,  there  being  20  K.  W.  II.'s  in  the 
Peak  column,  each  would  be  responsible  for  one-twentieth  of 
the  Investment  Charge. 

So  far  this  seems  correct  and  just,  but  now  come  the  16  K. 
W.  H.'s  in  column  (B)  and  make  use  of  the  plant  in  propor- 
tion to  the  height  of  their  column.  It  is  logical  and  just  that 
they  should  bear  their  portion  of  the  Investment  Charge,  so 
we  would  then  have  the  Charge  shared  among  36  K.  W.  H.'s 
instead  of  the  original  20.  Introducing  column  (C)  (14  K. 
W.  H.)  we  would  have  the  Investment  Charge  shared  among 
50  K.  W.  H.,  and  so  on  throughout  the  year  or  the  revenue 
period.  Each  K.  W.  H.  bearing  an  equal  portion  of  the 
Investment  Charge. 

There  is  nothing  new  about  this  theory  except  as  applied 
to  present  methods  of  reasoning  on  electric  rates. 

That  time  is  an  element  of  Investment  Charge  is,  as  stated 
above,  not  merely  a  theory,  but  an  accepted  principle  underly- 
ing nearly  all  commercial  calculation. 

In  some  of  the  larger  industrial  plants  the  cost  accounting 
even  goes  so  far  as  to  keep  account  of  the  time  of  use  of  the 
larger  machines  in  producing  a  certain  article,  and  tJic  cost 
of  the  article  is  charged  with  that  time  of  use  separately  from 
the  accompanying  labor  charge,  making  it  purely  an  Invest- 
ment Charge. 

Boiled  down  to  a  few  words,  the  theory  is  that  Investment 
Charge  is  a  species  of  rent  and  should  be  paid  in  proportion  to 
the  fraction  of  the  plant  used,  and  the  duration  of  the  time 
during  which  it  is  used. 

For  convenience  in  discussion,  let  us  call  the  theory  of  dis- 
tributing Investment  Charges  in  proportion  to  Peak  Responsi- 
bility the  Cause  of  Investment  Theory  and  the  theory  here 
advanced  and  diagramed  the  Use  of  Investment  Theory,  or  the 
Cause  Theory  and  Use  Theory. 

From  page  18  it  would  appear  eminently  unjust  and  illogical 
to  apply  the  Cause  Theory  alone,  even  if  correct  calculations 


«*    T  « 


Appendix   B 


21 


for  the  individual  consumer  could  be  made  under  it,  which 
from  preceding  pages,  seems  impossible. 

The  Use  Theory  seems  much  more  rational  and  more  likely 
to  result  in  substantial  justice  between  the  consumers.  The 
calculation  also  can  bo  easily  made  and  applied.  But  in  con- 
sidering the  entire  neglect  of  the  Cause  Theory  there  appear 
some  very  disturbing  possibilities,  as  illustrated  by  the  follow- 
ing case: 

Suppose  a  given  plant  having  apportioned  its  Investment 
Charge  evenly  over  the  estimated  K.  \V.  H.  consumption,  should 
take  on  a  consumer  or  class  of  consumers  who  would  cause  an 
increase  in  investment,  but  would  bring  a  K.  W.  H.  con- 
sumption of  a  less  ratio  to  the  increased  investment  than  the 
ratio  formerly  existing  for  the  whole  body  of  consumers.  The 
result  under  a  strict  application  of  the  Use  Theory  would  be  an 
increase  of  Investment  Charge  for  all  the  K.  W.  H.^s  sold^ 
without  the  original  consumers  receiving  any  additional  benefit 
as  consumers. 

This  line  of  reasoning  might  be  applied  throughout  the 
whole  building  up  of  the  business,  and  would  tend  to  show  that, 
theoretically  at  least,  the  Cause  Theory  should  not  be  wholly 
neglected  in  attempting  to  solve  the  problem  of  Individual  Cost 
to  Serve  Rates. 

It  would  seem  that  the  ideal  method  would  be  a  combina- 
tion of  the  Cause  Theory  and  the  Use  Theory.  But,  unfortu- 
nately, even  if  it  were  [)ossible  to  assign  even  approximately 
correct  charges  to  the  individual  under  the  Cause  Theory,  there 
is  no  logical  way  of  determining  the  proportion  of  weight 
which  each  of  the  two  theories  should  have  in  the  calculation. 

While  there  seems  to  be  no  absolutely  correct  theoretical 
solution  of  the  difficulty,  yet  it  may  perhaps  be  possible  to  find 
some  practical  solution  which  will  result  in  at  least  approxi- 
mate justice  to  all  consumers. 

Before  attempting  this,  however,  it  becomes  necessary  to 
present  data  as  set  forth  in  the  following  "Part"  of  this  anal- 
ysis: 


li 


r 


,, , 

II 


pi 


22 


Appendix   B 


PART  VII. 

In  attempting  to  adjust  rates  among  individual  consumers 
by  a  distribution  of  Investment  Cliarges,  in  accordance  with  the 
Cause  of  Investment  or  Peak  Responsibility,  we  find  it  impos- 
sible to  make  the  calculation  (even  granting  that  the  theory  is 
correct)  from  the  very  simple  fact  that  there  is  no  way  of 
determining  the  Peak  Responsibility  of  the  individual  except 
at  a  prohibitive  cost. 

The  Use  or  Rent  Theory  of  distribution  of  Investment 
Charges  we  find  easy  of  accurate  calculation  by  simply  spreading 
the  Investment  Charges  over  the  estimated  K.  W.  H.  output, 
and  we  also  find  the  theory  in  agreement  with  all  established 
commercial  usage,  and  probably  productive  of  more  approxi- 
mate justice  than  the  Cause  Theory  alone.  Nevertheless,  it 
must  be  conceded  that  the  Cause  of  Investment  has  some  bear- 
ing in  justice  on  the  distribution  of  Investment  Charges. 

In  an  effort  toward  a  better  understanding  of  the  question, 
the  writer  has  collected  the  following  data  in  regard  to  Class 
Loads  and  the  Peak  Responsibility  of  each,  as  shown  in  the 
operation  of  the  plant  of  the  Union  Electric  Light  and  Power 
Co.,  of  St.  Louis. 

It  must  be  kept  clearly  in  mind,  however,  that  it  by  no  means 
follows  that  data  which  is  correct  for  a  class  as  a  whole  can 
be  correctly  applied  to  the  individuals  of  that  class. 

As  shown  by  the  illustration  in  the  first  paragraph  on  page 
11,  the  calculation  of  averages  will  not  work  backward;  there- 
fore, any  adjustment  of  the  distribution  of  Investment  Charges 
based  on  class  data  should  be  applied  to  the  individual  with 
extreme  caution  and  with  the  clear  understanding  that  he  is 
being  either  penalized  or  rewarded  on  account  of  his  being  in 
the  class  to  which  he  is  assigned. 

In  the  year  1909  the  highest  Peak  in  the  combined  generat- 
ing curve  of  the  Union  Electric  Light  &  Power  Co.  (exclusive 
of  street  railway  load)  occurred  on  the  10th  of  December,  and 
for  the  present  purpose  this  is  taken  as  tlie  Investment  Peak 
of  the  plant. 


I* 

VTI 


i* 


Appendix   B 


25 


24 


Appendix   B 


Kesidence  Lighting. 

Taking:  up  first  tlic  dilTcrcnt  relations  of  residence  lighting 
service,  the  writer  sought  for  a  source  from  which  a  typical 
residence  lighting  curve  could  be  developed.  A  tolerably  sat- 
isfactory base  for  data  was  found  in  the  records  of  Feeder  No. 
5909,  which  serves  the  district  bounded  by  Clara  Avenue  on 
the  east,  Hodiamont  Avenue  on  the  west,  Cabanne  Avenue  on 
the  south,  and  Etzel  Avenue  on  the  north. 

There  are  516  customers  on  this  Feeder,  all  being  residences 
with  the  exception  of  two  churches  and  a  few  small  instances 
of  business  lighting. 

The  residences  in  the  district  vary  from  smaH  flats  to  large 
residences,  and  are  perhaps  as  typical  of  the  whole  body  of 
residences  as  any  group  which  could  be  found. 

The  Feeder  log  and  the  complete  monthly  accounts  and 
Connected  Load  record  of  each  consumer  were  available  and 
were  used  in  making  up  the  data. 

Plate  I  shows  the  combined  generating  curve  of  the  plant 
(exclusive  of  street  railway  load)  for  December  10th,  1909. 

Plate  IT  shows  the  typical  residence  curve  for  December  10th, 
1909. 

Consulting  the  curve  on  Plate  I  we  find  that  the  Investment 
Peak  occurs  at  5  p.  m. 

Consulting  Plate  II  we  find  that  where  the  typical  residence 
curve  crosses  the  5  o'clock  ordinate  it  shows  a  demand  of  81 
K.  W.,  therefore  these  residences  are  contributing  81  K.  W. 
to  the  Investment  Peak,  which  in  the  Cause  Theory  measures 
their  Peak  Eesponsibility  and  Investment  Kesponsibility. 

From  the  accounts  we  find  that  during  the  whole  year  the 
meters  of  the  consumers  responsible  for  the  Plate  II  curve, 
show  a  total  consumption  of  149,640  K.  W.  H.  Dividing  this 
figure  by  81  we  find  that  for  every  K.  W.  contributed  to  the 
Investment  Peak,  a  tjrpical  residence  load  will  bring  a  revenue 
from  1847  K.  W.  H.  or  the  ratio  between  K.  W.  H.  delivered 

yearly  and  K.  W.  of  Peak  Responsibility  is  l?i^ 


> ' 


V 


> 


Power. 

As  a  typical  Power  curve,  the  500-volt  current  of  the  Union 
Electric  Light  &  Power  Co.,  has  been  selected  as  being  a  pure 
Power  load.  The  curve  for  December  10th,  1909,  is  shown 
on  Plate  III,  where  we  find  the  Peak  Responsibility  is  2125 
K.  W. 

The  K.  W.  H.  delivered  to  the  consumers  is  derived  from 
the  generating  output  and  a  factor  of  Efficiency  of  Distribu- 
tion of  73%,  the  resulting  ratio  between  K.  W.  H.  delivered 


yearly  and  K.  W.'s  of  Peak  Responsibility  is 


3380 


Municipal  Lighting. 

While  we  have  no  specific  curve  on  Municipal  Lighting,  it 

being  a  4000  hour  flat  service,  we  can  safely  assume  that  the 

ratio  between  K.  W.  H.  .delivered  and  K.  W.  of  Peak  Respon- 

2920 
sibility  is  4000  x  .73  (efficiency  of  distribution)  =  -     . 


Business  Lighting. 

The  writer  has  been  able  to  obtain  a  number  of  curves  and 
accompanying  data  relating  to  different  kinds  of  business  con- 
sumers, but  all  of  them  are  for  large  concerns  in  which  Power 
forms  a  considerable  part  of  the  load.  There  is  nothing  at 
present  available  for  pure  business  lighting,  such  as  is  required 
by  service  to  smaller  or  average  size  concerns,  but  it  is  prob- 
able that  type  curves  of  business  light  might  be  obtained  by 
making  arrangements  of  connections  and  by  taking  proper 
readings  at  a  cost  not  out  of  proportion  to  the  value  of  the 
resulting  data. 

For  purposes  of  comparison,  there  can  be  assigned  to  each 
of  the  above  classes  what  may  be  called  a  Responsibility  Load 
Factor,  taking  into  account  the  Peak  Responsibility  of  each 
class  and  the  8760  hours  of  the  year.  These  factors  are  for 
Residence  Light,  21.1%;  for  Power,  38.6%;  for  Municipal 
Light,  33.3%. 


i 


INTENTIONAL  SECOND  EXPOSURE 


j^<»  — t»-;,rf»«iij**.»( 


>      . 


Appendix  B 


25 


24 


Appendix   B 


Residence  Lighting. 

Taking  up  Wn^i  tlic  dilTcrcnt  relations  of  residence  ligliiing 
service,  the  Avritcr  sought  for  a  source  from  Avhich  a  typical 
residence  lighting  curve  could  he  developed.  A  tolerahly  sat- 
isfactory base  for  data  was  found  in  the  records  of  Feeder  No. 
5909,  which  serves  the  district  bounded  by  Clara  Avenue  on 
the  east,  Hodiamont  Avenue  on  the  west,  Cabanne  Avenue  on 
the  south,  and  Etzel  Avenue  on  the  north. 

There  are  516  customers  on  this  Feeder,  all  being  residences 
with  the  exception  of  two  churches  and  a  few  small  instances 
of  business  lighting. 

The  residences  in  the  district  vary  from  smaH  flats  to  large 
residences,  and  are  perhaps  as  typical  of  the  whole  body  of 
residences  as  any  group  which  could  be  found. 

The  Feeder  log  and  the  complete  monthly  accounts  and 
Connected  Load  record  of  each  consumer  were  available  and 
were  used  in  making  up  the  data. 

Plate  I  shows  the  combined  generating  curve  of  the  plant 
(exclusive  of  street  railway  load)  for  December  10th,  1909. 

Plate  IT  shows  the  typical  residence  curve  for  December  10th, 
1009. 

Consulting  the  curve  on  Plate  I  we  find  that  the  Investment 
Peak  occurs  at  5  p.  m. 

Consulting  Plate  II  we  find  that  where  the  typical  residence 
curve  crosses  the  5  o'clock  ordinate  it  shows  a  demand  of  81 
K.  W.,  therefore  these  residences  are  contributing  81  K.  W. 
to  the  Investment  Peak,  which  in  the  Cause  Theory  measures 
their  Peak  Responsibility  and  Investment  Responsibility. 

From  the  accounts  we  find  that  during  the  whole  year  the 
meters  of  the  consumers  responsible  for  the  Plate  II  curve, 
show  a  total  consumption  of  149,640  K.  W.  H.  Dividing  this 
figure  by  81  we  find  that  for  every  K.  W.  contributed  to  the 
Investment  Peak,  a  typical  residence  load  will  bring  a  revenue 
from  1847  K.  W.  H.  or  the  ratio  between  K.  W.  H.  delivered 

yearly  and  K.  W.  of  Peak  Responsibility  is 


>' 


> 


Power. 

As  a  typical  Power  curve,  the  500-volt  current  of  the  Union 
Electric  Light  &  Power  Co.,  has  been  selected  as  being  a  pure 
Power  load.  The  curve  for  December  10th,  1909,  is  shown 
on  Plate  III,  where  we  find  the  Peak  Responsibility  is  2125 
K.  W. 

The  K.  W.  H.  delivered  to  the  consumers  is  derived  from 
the  generating  output  and  a  factor  of  Efficiency  of  Distribu- 
tion of  73%,  the  resulting  ratio  between  K.  W.  H.  delivered 

3380 
yearly  and  K.  W.'s  of  Peak  Responsibility  is  -—  . 


Municipal  Lighting. 

While  we  have  no  specific  curve  on  Municipal  Lighting,  it 

being  a  4000  hour  flat  service,  we  can  safely  assume  that  the 

ratio  between  K.  W.  H.  .delivered  and  K.  W.  of  Peak  Respon- 

2920 
sibility  is  4000  x  .73  (efficiency  of  distribution)  =  _     . 


Business  Lighting. 

The  writer  has  been  able  to  obtain  a  number  of  curves  and 
accompanying  data  relating  to  different  kinds  of  business  con- 
sumers, but  all  of  them  are  for  large  concerns  in  which  Power 
forms  a  considerable  part  of  the  load.  There  is  nothing  at 
present  available  for  pure  business  lighting,  such  as  is  required 
by  service  to  smaller  or  average  size  concerns,  but  it  is  prob- 
able that  type  curves  of  business  light  might  be  obtained  by 
making  arrangements  of  connections  and  by  taking  proper 
readings  at  a  cost  not  out  of  proportion  to  the  value  of  the 
resulting  data. 

For  purposes  of  comparison,  there  can  be  assigned  to  each 
of  the  above  classes  what  may  be  called  a  Responsibility  Load 
Factor,  taking  into  account  the  Peak  Responsibility  of  each 
class  and  the  8760  hours  of  the  year.  These  factors  are  for 
Residence  Light,  21.1%;  for  Power,  38.6%;  for  Municipal 
Light,  33.3%. 


i 


1 


i 


> 


i 


»»mm  im\»m(ymtt.imkt<iiim-fiimmttmm 


■MMWMHMi 


III 


I,' 


28  AppendixB 

Inserting  the  data  for  the  whole  output,  the  figures  may  be 
tabulated  as  follows: 

K.W.H.  Distributed 

Class.                               for  1  K.W.  of  In-  Responsibility 

vestment  Peak.  Load-Fiietor. 

Entire  Output 2243  K.W.H.  25.6% 

Power 3380  K.W.H.  38.6% 

Municipal  Light 2920  K.W.H.  33.3% 

Residence  Light 1847  K.W.H.  21.1% 

These  load  factoi-s  indicate  for  each  class  its  K.  W.  H.  con- 
sumption expressed  in  percentage  of  its  Maximum  possible 
consumption  without  increasing  its  Peak  Responsibility,  and 
indicate  with  some  accuracy  the  relative  desirability  of  each 
class  of  business  as  a  class. 

They  are  strictly  applicable  to  St.  Louis  only,  and  even  thus 
limited  would  be  influenced  somewhat  by  weather  and  other 
conditions  on  the  day  of  the  greatest  yearly  or  Investment 
Peak ;  but  are  accurate  enough  for  a  general  idea  of  the  com- 
parative revenue  values  of  the  classes  of  consumers  mentioned. 
Any  change  in  latitude  of  the  location  of  the  plant  would  of 
course  materially  change  the  results  by  changing  the  relative 
Peak  Responsibilities  of  Lighting  and  Power  loads. 

The  dogreo  of  justice  in  which  the  figures  can  bo  applied  to 
the  individual  would  depend  upon  liow  closely  tlic  individual 
load  curve  is  parallel  to  the  class  curve. 

In  Business  Lighting,  we  know  tliat  the  variety  of  curves 
would  be  very  great  and  that  a  number  of  sub-classes  would  be 
necessary  to  anything  like  a  just  use  of  the  figures  in  rate 

making. 

In  Residence  Lighting  the  individual  curve  would  probably 
approximate  much  more  closely  the  characteristics  of  the  class 
curve,  but  there  would  still  be  some  room  for  injustice  in 
strictly  applying  the  class  figures. 

In  Power  it  is  possible  that  the  individual  load  curves  would 
in  many  cases  approach  an  approximate  parallel  to  the  class 
curve,  allowing  the  use  of  the  figures  without  any  great  injus- 
tice among  the  individual  consumers,  exceptions  being  cared 
for  by  the  introduction  of  a  few  sub-classes. 

In  Municipal  Lighting,  of  course,  the  class  curve  and  indi- 
vidual curve  are  the  same. 


Appendix   B 


29 


The  above  method  of  arriving  at  data  for  making  Conces- 
sions to  the  Cause  Theory  is  only  intended  here  as  a  sugges- 
tion showing  a  possible  plan  for  arriving  at  Peak  Responsibil- 
ity figures  which  would  be  at  least  tolerably  accurate  for  the 
class.  Tlio  records  at  present  available  for  plotting  typical  or 
class  curves  are  somewhat  limited,  but  it  would  be  possible  to 
add  very  greatly  to  reliable  data  in  this  line. 

From  the  foregoing  it  would  appear  that  there  is  no  scientific 
and  practical  method  of  making  concessions  to  the  Cause  The- 
ory while  attempting  to  arrive  at  electric  rates  apportioned  to 
the  cost  to  serve  the  individual  consumer,  but  taking  as  a  base 
an  even  distribution  of  the  Investment  Charge  over  the  entire 
estimated  K.  W.  H.  in  accordance  with  Use  Theory,  and  then 
making  such  conservative  concessions  to  the  Class  Responsi- 
bility Load  Factors  as  may  appear  reasonable  to  the  Commis- 
sion, rates  may  be  arrived  at  which  will  perhaps  come  some- 
what nearer  to  the  individual  cost  to  serve  principle  than  rates 
in  which  the  Cause  Theory  is  entirely  ignored. 

It  may  be  advanced  by  way  of  criticism  that  in  conceding 
the  use  of  class  factors  in  an  attempt  to  calculate  individual 
cost  to  serve  rates,  the  writer  is  suggesting  one  of  the  things 
which  he  finds  fault  with  in  the  analysis- of  the  Connected  Load 
and  Maximum  Demand  methods.  There  is  to  be  said,  however, 
that  the  use  of  the  class  factor  as  here  suggested  is  not  funda- 
nionlal  to  the  calculation,  but  is  to  servo  merely  as  a  guide 
in  making  certain  concessions  to  a  principle  or  theory  (Cause 
Theory)  which  we  recognize  as  deserving  some  weight,  but 
the  application  of  which,  to  the  individual,  we  find  impossible 
of  calculation. 

This  is  by  no  means  satisfactory,  but  it  seems  the  best  that 
can  be  done  if  we  are  to  recognize  the  Cause  Theory  at  all. 

Another  puzzling  source  of  dissatisfaction  in  our  effort  to 
devise  just  rates,  is  what  has  already  been  mentioned  in  this 
report  as  the  Distance  Factor. 

The  location  of  different  consumers  require  widely  varying 
amounts  of  investment  in  wires,  poles,  conduits,  etc.,  in  order 
to  reach  them,  and  a  strict  adjustment  of  Cost  to  Serve  rates 
would  require  this  factor  to  be  recognized.  A  number  of 
schemes  to  recognize  it  have  been  proposed  from  time  to  time, 
but  the  practical  difficulties  in  the  way  are  so  great  that  the 


?i 


!  I 


i 


I 


^^^^^^B^^E 


30 


Appendix   B 


Appendix   B 


31 


■f 


I        I 


(.    ' 


problem  has  been  given  up  as  hopeless  of  useful  solution,  and 
the  Distance  Factor  is  generally  ignored  in  rate  making.  In 
certain  cases,  however,  it  might  be  possible  to  recognize  invest- 
ment ill  substations  or  transft)riTicrs. 

PART  VIII. 

In  attcnjpting  to  assign  rates  as  closely  as  possible  in  accord- 
ance with  the  Cost  to  Serve  principle,  great  care  must  be  exer- 
cised in  applying  new  rates  to  an  established  plant  and  busi- 
ness, that  a  raise  in  rate  for  certain  of  the  consumers  shall  not, 
by  driving  them  to  other  sources  of  power  and  light,  so  de- 
crease the  general  consumption  as  to  materially  increase  the 
Investment  Charge  for  those  consumers  who  remain. 

This  brings  us  to  the  consideration  of  a  phase  of  rate  making 
entirely  distinct  from  the  question  of  just  apportionment  of 
costs  to  serve  among  the  individual  consumers,  but  having  a 
vital  relation  to  the  cost  to  serve  as  a  whole. 

The  principle  involved  may  be  called  the  Expediency  Prin- 
ciple, and  in  the  public  regulation  of  rates  it  presents  some 
extremely  puzzling  aspects,  owing  to  the  fact  that  any  improve- 
ment in  the  load  factor  of  a  plant  can  be  shown  to  offer  the 
opportunity  for  a  decrease  in  the  Investment  Charge  per  K. 
W.  11.  In  fact,  even  witliout  an  iniprovcniont  or  with  an 
actual  iinpnirinont  of  tlio  load  factor,  most  plants  can  sliow 
an  opportunity  for  at  least  a  temporary  decrease  in  Invcstmcnfi 
Charge  per  K.  W.  II.  by  the  mere  increase  in  the  volume  of 
business.  This  last  phase  is  due  to  the  fact  that  under  ordi- 
nary conditions  the  capacity  of  a  plant  may  be  considerably 
increased  without  making  a  proportionate  increase  in  the  whole 
investment. 

Given  a  certain  plant,  we  generally  find  that  the  original  and 
necessary  investment  in  real  estate,  buildings,  poles,  and  under 
certain  circumstances,  conduits,  need  not  be  increased  mater- 
ially to  adequately  care  for  a  very  considerable  increase  in 
capacity. 

(In  using  the  Investment  Peak  in  the  theoretical  calculation 
of  Cost  to  Serve  rates,  these  more  or  less  fixed  investment  items 
are  immediately  redistributed  among  the  K.  W.'s  of  the  Peak 
upon  any  change  taking  place  in  the  Peak.) 


Where  there  is  no  public  regulation  of  rates,  the  conditions 
described  above  offer  constant  opportunity  for  increase  in  profit 
to  the  company  by  taking  on  consumers  whose  business  will 
not  stand  the  full  and  just  share  of  Investment  Charges  of  the 
whole  plant,  but  wlio  will  pay  a  rate  giving  a  substantial  profit 
over  manufacturing  cost,  the  balance  of  the  consumers  bcitig 
left  to  bear  tlie  greatest  part  of  the  Investment  Charges.  Under 
public  regulation  it  may  be  required  that  the  whole  body  of 
consumers  shall  receive  a  fair  reduction  of  rate  as  the  Invest- 
ment Charges  per  K.  W.  H.  diminish  with  the  increased  out- 
put. A  correct  application  of  the  Expediency  Principle  re- 
quires that  no  concession  in  price  shall  be  made  to  one  con- 
sumer or  class  of  consumers,  unless  it  is  very  clear  that  such 
concession  will  be  to  the  distinct  advantage  of  all  the  con- 
sumers. 

Before  leaving  the  subject  of  Expediency,  it  may  be  pertinent 
to  briefly  mention  the  custom  of  giving  wholesale  discounts,  de- 
pending solely  upon  the  quantity  of  current  used  or  the  size 
of  the  consumer's  bill. 

If  it  can  be  shown  conclusively  that  it  costs  less  to  serve  a 
large  consumer,  a  discount  or  lower  rate  is  justifiable,  under  the 
Cost  to  Serve  principle,  but  it  is  justifiable  only  so  far  as  it  is 
cheaper  to  serve  him,  or  the  low  rate  may  be  justifiable  under  the 
Expediency  Principle,  but  there  can  be  no  justification  of  a 
wholesale  discoimt,  except  under  tliese  two  principles,  for  under 
])ublic  regulation,  where  income  is  a[)proxiinalely  a  fixed 
amount,  no  consumer  can  escape  a  part  of  his  proportion  of 
charges  without  shifting  the  burden  to  another. 

The  admission  of  the  Expediency  Principle  into  rate  regu- 
lation, while  in  some  cases  necessary,  and  for  the  benefit  of 
the  consumers,  will,  if  followed  too  far,  result  in  the  absolute 
destruction  of  any  plan  or  mode  of  calculation  based  upon 
equity  between  the  consumers;  and  the  very  difficult  problem 
presents  itself  to  the  Commission  of  determining  how  far  it 
is  wise  to  depart  from  the  sound  and  just  principle  of  Cost 
to  Serve,  for  the  sake  of  a  possibly  lower  rate  resulting  from 
increased  volume  of  business. 


1 


'  1 


I "•" i't'iiiii''!! liiiiiVf'"" ' "■■ 


32 


Appendix   B 


Conclusions. 

As  the  final  result  of  our  analysis  we  find: 

1st:  That  neither  the  Connected  Load  nor  the  Maximum 
Demand  of  the  consumer  are  rational  faciore  to  enter  into 
Cost  to  Serve  rates. 

2nd:  That  if  the  Use  Theory  alone  is  applied,  the  Invest- 
ment Charge  will  distribute  itself  into  a  level  K.  W.  H.  Charge, 
and  that  the  only  differential  element  will  be  the  application 
of  the  Customer  Charge. 

3rd :  That  there  is  no  practical  method  of  calculating  indi- 
vidual Cost  to  Serve  rates  according  to  the  Peak  responsibility 
or  Cause  Theory,  and  that  any  concession  to  this  theory  must 
.be  based  upon  Class  Factors. 

4th:  That  for  the  general  good  of  the  consumers  it  may 
be  necessary  to  modify  Cost  to  Serve  rates  on  the  Expediency 
Principle. 


APPENDIX    C 


Rate  Calculations 

FOR 

Electric   Light  and   Power 


REPORT  TO 


ST.  LOUIS  PUBLIC  SERVICE 

COMMISSION 


BY 


James  E.  Allison, 

Commissioner  and  Chief  Engineer 


f 

y 


API'ENDIX     C 


DEFINITION  OF  TERMS. 

"Cause  Theory.'^  The  calculation  of  a  rate  by  distributing 
the  Investment  Charge  in  proportion  to  the  Consumers'  Peak 
Responsibility,  or  cause  of  investment.  (See  page  5  this 
report,  or  Part  VI,  first  report.) 

''Use  Theory. ''  The  calculation  of  a  rate  by  distributing  the 
Investment  Charge  in  proportion  to  the  Consumers'  use  of  the 
investment  or  K.  W.  H.  Consumption.  (See  page  8  of  this 
report,  or  Part  VI,  first  report.) 

"Expediency."  The  departure  from  "cost  to  serve"  rates 
necessary  to  maintain  the  output  at  the  point  where  the  lowest 
cost  can  be  obtained  for  the  consumers  as  a  whole.  (See  also 
Part  VIII,  first  report.) 

"Investment  Peak."  The  highest  point  in  the  yearly  load 
curve.     (See  pages  3  and  4,  first  report.) 

"Peak  Responsibility."  The  Consumers'  share  in  the  K. 
W.  demand  on  the  Investment  Peak. 

"Customers'  Charge."  (See  page  6,  this  report,  or  page  3, 
first  report.) 

"Manufacturing  Charge."  (See  page  6,  this  report,  or  page 
3,  first  report.) 

"Investment  Charge."  (See  page  6,  this  report,  or  page 
3,  first  report.) 

"Distance  Factor."  Factor  needed  to  correct  differences  in 
investment  in  distribution  equipment  to  serve  different  con- 
sumers.    (Generally  not  determinable.) 


»t. 


i 


\ 


V 


Appendix   C 


Messrs.  Joseph  L.  Hornsby,  Chairman; 
James  A.  Waterworth, 
James  E.  Allison, 

Saint  Louis  Public  Service  Commission. 

Gentlemen : 

In  submitting  to  you  a  report  on  Analysis  of  Rate  Calcula- 
tions for  electric  light  and  power,  dated  August  25th,  1910, 
the  writer  attempted  to  show  the  fallacy  of  some  of  the  meth- 
ods of  calculation  in  use  for  arriving  at  a  measure  of  "cost  to 
serve"  in  electric  rates. 

The  principal  object  of  the  report  was  to  lay  before  the 
Commission  the  fact  that  calculations  based  upon  the  con- 
nected load  or  maximum  demand  of  the  consumer  as  used, 
could  not  be  successfully  set  up  as  a  true  measure  of  the  cost 
to  serve  the  consumer,  especially  the  residence  consumer. 

The  analysis  was  also  intended  to  show  that  two  methods 
of  distributing  the  investment  charge  might  be  set  up,  one 
based  upon  the  investment  which  the  consumer  may  cause, 
and  another  based  upon  his  use  of  the  investment. 

The  writer  has  been  misunderstood  in  some  quarters  as  advo- 
cating the  Use  method  alone,  or  even  so  far  misunderstood 
as  to  be  advocating  a  level  rate.  No  one  with  even  a  super- 
ficial knowledge  of  the  principles  and  conditions  of  rate  making 
can  think  for  an  instant  that  a  level  rate  is  either  practicable 
or  just. 

While  the  Cause  Theory  and  Use  Theory  are  both,  to  a 
certain  extent,  logical,  yet  calculations  based  upon  them  fail 
of  scientific  correctness. 

First:  In  that  while  both  the  cause  and  the  use  of  the 
investment  should  be  considered  in  a  cost  to  serve  rate,  un- 
fortunately there  is  no  logical  means  by  which  the  relative 
importance  of  the  two  theories  can  be  determined  or  combined 
into  one  calculation. 

Second :  In  that  in  calculating  rates,  according  both  to  the 
Cause  Theory  and  the  Use  Theory,  the  differentiation  of  the 
rates  is  necessarily  based  upon  data  derived  almost  entirely 
from  the  generating  end  of  the  business,  and  no  account  is 


/ 


« 


I 


4  AppendixC 

taken  of  the  difference  in  distribution  equipment  required  by 
different  consumers. 

Third :  In  that  the  Expediency  principle,  which  is  of  very 
great  importance,  both  to  the  company  and  to  the  consumer, 
cannot  be  mathematically  taken  into  the  calculations. 

There  is  a  possible  third  theory  or  rather  method  of  cal- 
culating rates  which  in  its  effect  may  be  said  to  be  a  com- 
promise between  the  Cause  Theory  and  the  Use  Theory.  This 
method  is  based  upon  the  theoretical  assumption  that  the  oper- 
ation of  the  plant  and  the  investment  in  the  plant  are  entirely 
separated,  just  as  if  the  operating  department  rented  the  plant 
from  the  owners.  There  is,  then,  a  fixed  rent  or  return 
assumed  upon  the  investment,  and  an  entirely  separate  profit 
or  return  fixed  upon  the  operation  or  volume  of  business.  This 
profit  would  be  charged  up  to  the  manufacturing  cost  in  the 
current,  and,  being  added  to  each  K.  W.  H.  as  manufacturing 
profit,  would  be  distributed  among  the  consumers  in  accordance 
with  the  use  or  K.  W.  H.  Consumption,  thereby  in  a  measure 
making  concession  to  the  Use  Theory,  the  distribution  of  the 
investment  charge  being  made  by  the  Cause  Theory. 

The  trouble  with  this  method  is,  that  if  in  dividing  the 
profit  or  return  between  investment  and  operation  we  consider 
the  usual  per  cent  of  return  on  volume  of  sales  in  any  staple 
business,  we  find  that  the  calculation  brings  very  little  differ- 
ence in  results  from  calculations  based  purely  upon  the  Cause 
Theory. 

Admitting  that  there  is  no  absolutely  scientific  and  accurate 
method  of  calculating  cost  to  serve  rates,  what  method  is  it 
advisable  to  adopt  to  arrive  at  what  may  be  as  nearly  as  pos- 
sible just  and  practicable  results? 

About  the  only  course  left  open  is  to  have  calculations  made 
by  formulae,  derived  both  from  the  Cause  Theory  and  the 
Use  Theory,  and  then  to  take  as  approximate  standards  such 
compromises  between  these  two  rates  as  may  be  arrived  at  by 
judgment  alone. 

Having  these  standards,  the  Commission  must  again  rely  to 
a  large  extent  upon  its  judgment  in  allowing  concessions  to  the 
Expediency  principle,  and  to  the  distance  or  distribution  in- 
vestment factor.  This  last  factor  being  sometimes  used  as  an 
argument  to  justify  wholesale  discounts. 


> 


n.> 


< 


y 


AppendixC  5 

The  conclusion  that  scientifically  correct  rates  for  electricity 
cannot  be  mathematically  calculated  is  not  a  welcome  one, 
but  it  is  the  truth,  and  it  is  much  better  to  know  and  acknow- 
ledge the  truth  than  to  follow  blindly  a  false  or  only  partially 
true  formula.  Especially  is  this  true  in  the  case  of  a  Public 
Service  Commission  charged  wath  the  duty  of  fairness  both 
to  the  consumer  and  the  company. 

While  we  cannot  say  that  a  rate  is  absolutely  correct  scien- 
tificially,  yet  with  the  data  available  it  is  quite  possible  to 
arrive  at  rates  which  will  not  only  be  substantially  just  and 
perfectly  practical,  but  which  can  also,  in  a  measure,  be  de- 
fended scientifically. 

CAUSE  THEORY  RATES. 

The  Cause  Theory  is  based  upon  the  assumption  that  the 
investment  in  plant  is  made  to  meet  the  demand  of  the  highest 
peak,  and  that  therefore  each  individual's  share  in  paying  the 
yearly  investment  charge  should  be  in  direct  proportion  to 
his  peak  responsibility,  i.  e.,  to  his  share  in  this  highest  or 
investment  peak. 

The  theory  has  two  decidedly  w^eak  points.  First,  it  assigns 
all  of  the  investment  charge  to  the  consumer  or  the  current 
which  comes  on  the  investment  peak,  and  absolutely  none  of 
the  investment  charge  to  those  consumers  or  that  portion  of 
the  current  which  does  not  come  on'  the  peak. 

Second,  there  is  no  practical  way  of  determining  the  Peak 
Responsibility  of  the  individual  consumer,  and  we  are  driven 
in  making  calculations  to  use  the  Peak  Responsibility  of  classes 
of  consumers. 

These  class  Peak  Responsibilities  may  be  obtained  as  de- 
scribed in  relation  to  residence  load  on  page  24  of  my  former 
report.  It  is  evident,  however,  that  the  segregation  of  classes 
of  business  upon  separate  feeders,  in  order  to  obtain  data,  may 
not  always  be  an  easy  or  simple  matter. 

As  pointed  out  in  my  former  report,  the  justice  of  applying 
class  data  to  the  individual  is  measured  by  the  similarity  in 
shape  of  his  load  curve  to  the  load  curve  of  his  class. 

Fortunately,  in  two  important  classes  of  consumers,  resi- 
dence and  power,  we  may  assume  that  the  4m  load  curves  and 


^ 


g  Appendix   C 

the  individual  load  curves  are  approximately  parallel,  at  least 
enough  so  to  assume  that  there  will  be  no  great  injustice  in  as- 
signing to  the  individual  the  same  K.  W.  of  Peak  Responsibility 
per  K.  W.  H.  of  consumption  as  is  shown  to  be  right  for  his 
class. 

Being  assured,  then,  that  our  data  will  enable  us  to  get 
approximately  correct  results  to  the  individual,  according  to 
the  Cause  Theory,  in  at  least  the  residence  and  power  classes, 
we  may  proceed  to  develop  our  formula  for  the  calculation. 

First,  we  take  the  gross  income  required  to  be  obtained  from 
the  sale  of  current,  which  should  equal  the  operating  expenses, 
plus  the  taxes  and  insurance,  plus  the  proper  depreciation  and 
amortization  charges,  plus  the  proper  return  on  the  investment. 
This  we  call  the  Total  Cost. 

This  Total  Cost  we  then  divide  into  three  parts. 

First :  The  Customer's  Charge,  which  is  that  portion  of  the 
cost  caused  by  the  mere  connection  of  the  customer,  irrespective 
of  his  use  of  current.  Costs  assignable  to  this  charge  being 
such  as  the  cost  of  reading  the  meter,  making  the  bills,  keeping 
the  accounts,  etc.,  etc.  The  charge  being  the  same  for  each 
individual  consumer. 

Second:  The  Manufacturing  Charge,  or  cost  of  manufac- 
turing and  delivering  the  current,  irrespective  of  the  invest- 
ment. 

Third:  The  Investment  or  Demand  Charge,  consisting  of 
return  on  investment,  taxes  and  insurance,  depreciation  and 
perhaps  some  of  the  operating  charges  traceable  to  demand. 

The  selection  of  the  items  of  expense  which  should  properly 
be  included  in  the  Customers'  Charge  is  a  matter  of  much 
debate,  and  according  to  the  mind  of  the  ratemaker,  the  Cus- 
tomers' Charge  may  be  made  to  vary  greatly. 

To  obtain  the  rate  for  a  class  (or  an  individual,  if  we  could 
get  the  data)  we  have  the  Peak  Responsibility  of  the  class  ob- 
tained as  shown  in  part  VII  of  my  former  report,  and  as  the 
theory  assumes  that  Peak  Responsibility  is  the  measure  of  in- 
vestment responsibility,  the  investment  charge  for  the  class 
would  be  the  same  decimal  of  the  total  investment  charge  as 
the  class  peak  responsibility  is  of  the  investment  peak. 

It  is  also  evident  that  the  class  charge  for  manufacturing 


r 


f  > 


ii 


(     ' 


y 


V 


V 


'^ 


I 

i 


Tl. 


f 


: 


AppendixC  7 

cost  would  be  the  same  decimal  of  the  total  manufacturing 
cost  as  the  class  consumption  of  K.  W.  H.  is  of  the  total  con- 
sumption of  K.  W.  H. 

The  individual  Customer's  Charge  would  be  the  total  Cus- 
tomers' Charge  divided  by  the  total  number  of  customers,  and 
the  amount  of  Customers'  Charge  assignable  to  a  class  would 
be  the  Individual  Customer's  Charge  multiplied  by  the  number 
of  customers  in  the  class. 

Having,  then,  the  investment  cost  for  the  class,  the  manu- 
facturing cost  for  the  class  and  the  total  Customers'  Charge  for 
Ihe  class,  we  have  but  to  divide  the  sum  of  them  by  the  esti- 
mated or  ascertained  K.  W.  H.  consumption  of  the  class  to 
arrive  at  the  average  rate  of  the  class. 

However,  as  the  Customers'  Charge  should  properly  be  as- 
signed flat  to  each  customer,  it  is  better  to  so  divide  the  calcula- 
tion as  to  give  the  rate  exclusive  of  the  Customers'  Charge,  and 
:also  with  the  Customers'  Charge  absorbed. 

Reducing  to  formulae,  let 

R= Total  Cost. 

A = Total  Investment  Charge. 
B= Total  Manufacturing  Charge. 
C= Total  Customers'  Charge. 
D= Total  Consumption  K.  W.  H. 
E= Total  Number  of  Consumers. 
P= Investment  Peak  (K.  W.). 
A+B  +  C=R. 

r= Class  Peak  Responsibility  (K.  W.). 
s  =  Class  Consumption  (K.  W.  H.). 

t= Number  of  Consumers  in  class. 
X  =  Class  Rate  exclusive  of  Customers'  Charge. 
Y  =  Class  Rate  with  Customers'  Charge  absorbed. 


8 


Appendix  C 


Appendix   C 


9 


i! 


r 

-=r  =  Decimal  of  Class  Peak  Responsibility. 


s 
D 


=  Decimal  of  Class  Manufacturing  Cost  Responsibility. 


— -  =  Individual  Customer's  Charge. 


Then 


8 


r   A       s  _.  .    C  ^ 
_A+-B+^t 


=Y 


s 


C 


When  X  is  used  as  rate,  —  would  be  charged  flat  to  each 
customer. 


USE  THEORY  RATES. 

In  the  Use  Theory,  we  start  with  the  assumption  that  each 
consumer  should  pay  investment  charges  according  to  the 
portion  of  the  plant  he  uses,  regardless  of  whether  it  is  on  or 
off  the  peak,  and  also  in  proportion  to  the  duration  of  the  time 
he  uses  it.  In  other  words,  for  each  kilowatt  hour  of  service 
he  pays  his  prorate  of  the  investment  charge  as  divided  among 
all  the  kilowatt  hours  produced  during  the  year. 

The  weak  point  in  this  theory  is  that  it  makes  no  provision 
for  a  just  charge  to  the  consumer  who  causes  a  large  investment 
and  contributes  a  small  return  toward  the  general  fund  for 
paying  the  investment  charges. 

Nevertheless,  it  does  provide  investment  charges  for  the  off- 
peak  load,  which  gets  the  benefit  of  the  investment  as  well  as 
the  peak  load. 


r 


'ii 


V 


V 


/f  ■  ^ 


The  formula  for  calculating  rates  by  the  Use  Theory  is 
developed  by  simply  taking  the  total  Investment  Charge  plus 
the  Total  Manufacturing  Charge  and  distributing  it  equally 
over  the  total  estimated  K.  W.  H.  consumption.  To  this  there 
is  to  be  added  the  Customers'  Charge,  either  flat  to  each  cus- 
tomer, or  if  it  is  to  be  absorbed  into  the  rate  by  classes,  the 
Individual  Customer's  Charge  is  multiplied  by  the  number  of 
customers  in  the  class  and  divided  by  the  K.  W.  H.  Consump- 
tion of  the  class.  The  result  is,  the  extra  charge  to  be  added 
in  absorbing  the  Customer's  Charge  into  the  class  rate. 

Reducing  to  formula  and  using  the  same  letters  as  in  the 
Cause  Theory,  we  have 


A+B 
D 


=  X 


A  +  B 
D 


+ 


C^ 

E 


s 


=  Y 


C 


When  X  is  used  as  rate,  ^=-  would  be  charged  flat  to  each 


customer. 


E 


Having  developed  our  formula  for  calculating  rates  accord- 
ing to  the  two  theories,  Cause  and  Use  of  the  Investment,  let 
us  briefly  review  the  points  in  which  they  supplement  each 
other. 

The  Cause  or  Peak  Responsibility  Theory,  as  we  see,  does 
not  provide  that  the  off-peak  load  shall  pay  any  of  the  invest- 
ment charges.  Now,  as  a  matter  of  fact,  the  benefit  derived 
by  the  consumer  from  the  Company's  investment  or  his  use 
of  that  investment  may  not  be  at  all  in  proportion  to  his  peak 
responsibility.  Yet,  by  the  Cause  Theory  he  pays  investment 
charges  directly  in  proportion  to  it. 

For  illustration,  let  us  suppose  the  extreme  case  of  a  theater 
which  does  not  give  matinees.  Here  we  would  have  a  large 
load,  no  part  of  which  would  be  likely  to  come  on  the  peak. 
It  would,  therefore,  by  the  strict  application  of  the  Cause 
Theory,  escape  all  investment  charges,  and  if  all  returns  and 
profits  were  figured  as  part  of  the  investment  charges,  the  cur- 
rent would  even  be  sold  at  exact  cost  to  the  Company.      The 


10 


Appendix   C 


result,  we  see,  is  an  absurdity,  in  that  this  consumer  has  the 
use  and  benefit  of  large  investment  which  is  paid  for  by  some 
one  else.  The  same  reasoning  will  apply  in  a  measure  to  all 
loads  having  small  peak  responsibility  in  proportion  to  their 
use  of  the  plant  (or  K.  W.  H.  consumed),  and  it  will  apply 
inversely  to  loads  having  large  peak  responsibility  in  proportion 
to  their  use  of  the  plant  (or  K.  W.  H.) 

The  Use  Theory  is  the  exact  opposite  of  the  Cause  Theory, 
in  that  it  considers  exclusively  the  use  of  the  plant  made  by 
the  consumer,  to  the  entire  neglect  of  his  peak  responsibility. 
The  one,  in  a  way,  supplements  the  other,  and  (leaving  out 
of  account  the  Expediency  principle  and  the  distance  factor) 
we  may  assume  with  as  much  confidence  as  is  possible  in  deal- 
ing with  the  kaleidoscopic  question  of  rates  that  approximate 
truth  is  somewhere  between  the  results  of  the  two  calcula- 
tions. 

At  what  point  between  these  two  results  the  approximate 
truth  may  lie,  must,  as  stated  before,  be  determined  by  judg- 
ment alone.  In  such  a  case  there  is,  unfortunately,  very  little 
to  base  judgment  upon.  Very  fortunately,  however,  the  re- 
sults of  the  two  calculations  when  applied  to  actual  facts  do 
not  show  a  wide  variation,  as  is  seen  by  reference  to  Table  I. 

In  this  Table  the  actual  operations  of  the  Union  Electric 
Light  and  Power  Company  for  the  year  1909  have  been  taken 
as  a  basis  for  the  calculation  (the  street  railway  business  being 

omitted) . 

The  figures  are,  of  course,  only  used  for  illustration,  and  it  is 
not  intended  to  imply  that  the  rates  evolved  are  either  correct 
or  incorrect  for  producing  a  proper  return. 

RESIDENCE  RATES. 

In  Table  I  the  writer  has  assumed  five  different  amounts  a? 
individual  Customer's  Charge  per  year,  namely:  $6.00,  $9.00, 
$12.00,  $15.00  and  $18.00  per  year  per  customer;  and  the 
Table  shows  rates  calculated  under  each  of  these  assumptions. 
It  is  seen  by  comparing  the  results  that  in  residence  rates, 
especially,  the  Customers'  Charge  is  really  the  controlling  fac- 
tor in  the  differentiation  of  the  rate.  This  fact  is  shown  by 
comparing  the  figures  opposite  ''residence"  in  columns  3  and 


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12 


Appendix   C 


8  of  the  Table,  as  they  appear  in  the  $6.00,  $9.00,  $12.00, 
$15.00  or  $18.00  Customers'  Charge  group. 

It  is  seen  that  a  difference  of  about  4  cents  per  K.  W.  H. 
is  made  in  the  average  residence  rate  by  assigning  $18.00  per 
year,  or  $6.00  per  year  per  customer,  to  this  charge.  It  is 
evident,  therefore,  that  to  obtain  an  approximately  just  rate 
great  care  must  be  exercised  in  selecting  those  items  which 
can  properly  be  taken  into  account  in  making  up  the  Cus- 
tomers' Charge.  By  loose  reasoning  on  this  point  it  is  possible 
to  place  a  very  unjust  burden  upon  the  small  consumer  and 
upon  the  residence  consumers  as  a  whole. 

No  item  should  be  accepted  unless  it  is  shown  to  be  such  as 
is  caused  directly  by  the  consumer  irrespective  of  his  use  of 
current,  and  that  each  consumer  is  responsible  for  approxi- 
mately an  equal  amount  of  the  item.  If  this  cannot  be  dem- 
onstrated it  must  be  assumed  either  that  the  item  is  one  caused 
in  proportion  to  the  use  or  K.  W.  H.  Consumption,  or  that  it 
is  of  such  a  general  nature  that  it  should  be  assigned  in  pro- 
portion to  the  benefit  in  service  received  by  the  consumer. 
In  either  case  the  item  would  properly  be  a  K.  W.  H.  charge. 
It  has  been  argued  that  all  the  items  of  general  expense  such 
as  executive  salaries,  etc.,  etc.,  should  be  included  in  Customers' 
Charge.  The  basis  of  this  argument  is  that  general  expenses 
increase  or  decrease  directly  as  the  number  of  customers  in- 
crease or  decrease,  and  therefore  the  customers  should  bear 
an  equal  individual  responsibility  for  such  charges. 

In  the  first  place,  the  assumption  is  erroneous.  As  shown 
by  Table  II  (made  from  the  Union  Electric  Light  and  Power 
Company's  books),  the  general  expense  does  not  increase  or 
decrease  in  direct  proportion  to  the  number  of  customers.  In 
the  second  place,  even  if  it  did,  that  is  no  demonstration  that 
each  customer,  regardless  of  his  consumption,  is  equally  re- 
sponsible for  the  charge,  and  the  possible  injustice  of  loading 
up  the  small  consumer  with  charges  for  which  he  may  not  be 
responsible  is  quite  apparent. 

Table  III  shows  the  variation  of  general  expense  as  applied 
to  each  K.  W.  H.  of  output,  and  it  is  seen  that  an  argument 
that  general  expense  increases  or  decreases  with  output  is  quite 
as  tenable  as  the  argument  that  it  varies  with  the  number  of 
customers. 


4 


r 


^>* 


I 


Appendix   C 


13 


In  Table  II  the  highest  point  of  the  charge  per  customer 
is  132  per  cent  of  the  lowest  point,  while  in  Table  III  the 
highest  point  of  the  charge  per  K.  W.  H.  is  only  119  per 
cent  of  the  lowest  point,  showing  that  the  general  expense 
follows  more  closely  to  the  variation  of  the  output  than  it  does 
to  variation  of  the  number  of  customers. 

The  argument  is  not  conclusive  either  way,  as  assignment 
of  items  to  general  expense  may  be  varied  with  accounting 
methods. 

It  is  true  that  certain  items  and  portions  of  items  of  general 
expense  may  be  justly  assigned  to  Customers'  Charge,  but  such 
items  must  be  carefully  sought  out  and  their  relation  to  the 
customer  definitely  established. 

In  cases  of  doubt,  the  benefit  must  be  given  to  the  small 
man,  and  no  "glittering  generalities"  can  be  accepted  as  ground 
for  swelling  the  Customers'  Charge. 

It  has  been  advanced  as  an  argument  for  high  residence  rates 
that  the  efficiency  of  distribution  for  residence  load  is  very 
low  on  account  of  the  constant  24-hour  iron  loss  in  the  trans- 
formers, but  actual  measurements  of  the  all-day  efficiency  do 
not  show  that  the  efficiency  of  distribution  in  residences  is 
necessarily  less  than  the  average  efficiency  of  distribution  for 
the  whole  plant. 

In  other  words,  actual  measurements  in  the  case  under  con- 
sideration do  not  show  that  there  is  greater  loss  in  distributing 
to  residences  than  to  the  average  business. 

Table  I  also  shows  the  rates  worked  out  on  the  basis  of  dis- 
tributing the  Investment  Charge  in  proportion  to  the  Con- 
nected Load  by  each  class,  and  the  results  as  shown  in  column 
12  tend  to  prove  the  writer's  contention  in  his  former  report 
that  Connected  Load  is  not  a  proper  factor  in  rate  making. 

The  only  reason  which  can  be  advanced  for  using  Connected 
Load  as  a  factor  is  that  it  is  an  attempt  to  measure  the  con- 
sumer's peak  responsibility.  Under  the  Cause  Theory  in 
the  Table,  we  show,  by  another  method,  rates  in  which  the 
peak  responsibility  is  obtained,  as  closely  as  is  possible  with  ex- 
isting data.  A  comparison  of  the  figures  in  column  3,  column 
8  and  column  12  will  show  the  injustice  which  might  be  done, 
especially  to  the  residence  class,  by  allowing  the  connected 
load  method  of  calculation  to  stand  as  correct. 

No  company  of  any  size  can,  of  course,  put  into  effect  resi- 


14 


Appendix   C 


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Appendix   C 


15 


Af 


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V 


dence  rates  based  upon  a  distribution  of  investment  charges 
in  proportion  to  Connected  Load,  but  the  calculation  has  been 
used,  and  will  probably  continue  to  be  used,  until  thoroughly 
discredited,  as  an  argument  to  justify  high  residence  rates. 

Table  I  shows,  in  columns  7,  11  and  15,  the  portions  of  the 
revenue  to  be  produced  from  each  class  under  the  different 
theories  and  by  the  different  assumptions  of  Customers'  Charge. 
The  total  revenue  in  each  case  should  be  the  same,  but  the 
figures  in  the  Table  vary  slightly,  owing  to  the  calculations 
not  being  carried  out  beyond  three,  four  or  five  decimal  points 
in  some  of  the  factors. 

Column  5  in  Table  I  shows  the  average  class  rate  under  the 
Cause  Theory  which  would  be  paid  per  K.  W.  H.  provided  the 
Customers'  Charges  were  assessed  flat  to  each  customer,  and 
column  10  shows  the  same  charge  under  the  Use  Theory. 

The  assessment  of  the  Customers'  Charge  flat  to  each  cus- 
tomer is  the  theoretically  correct  and  just  plan  for  distributing 
that  part  of  "cost  to  serve"  among  the  customers,  but  on 
account  of  the  extreme  unpopularity  of  any  flat  charge  there 
are  very  serious  questions  of  policy  involved  in  deciding 
whether  to  assign  the  Customers'  Charge  flat  to  each  consumer 
or  to  absorb  it  in  an  average  class  rate. 

If  our  assumption  is  correct  that  individual  residence  load 
curves,  are  approximately  parallel  to  the  class  curves, 
then  the  rate  under  either  the  Cause  or  Use  Theory 
(with  the  exception  of  the  differentiation  caused  by  the  cus- 
tomer charge)  should  be  the  same  for  all  consumers  in  that 
class,  unless  the  application  of  the  Expediency  principle  is 
shown  to  be  necessary.  A  study  of  the  classification  of  cus- 
tomers, according  to  consumption,  as  compiled  for  the  Com- 
mission, shows  us  that  in  the  residence  class  there  are  practically 
no  really  large  consumers,  and  the  number  who  are  enjoying 
appreciable  discounts  for  quantity  would  not  materially  affect 
the  business,  even  if  they  betook  themselves  to  other  sources 
of  light.  As  a  matter  of  fact,  the  large  consumer  of  residence 
light  is  the  most  unlikely  person  to  discontinue  service  on 
account  of  price. 

It  can  therefore  be  concluded  that  the  Expediency  principle 
is  not  applicable  to  the  residence  class  unless  it  can  be  shown 
to  be  both  just  and  necessary  that  this  class  should  be  burdened 
with  some  of  the  costs  of  other  classes  of  consumers. 


16 


Appendix   C 


Appendix   C 


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If  the  last  condition  is  not  admitted  we  can  conclude  that 
the  results  arrived  at  from  the  use  of  the  formulae  will  give  very 
closely  the  correct  rat^s  for  residence  light. 

POWER  RATES. 

In  considering  the  rates  for  power  we  can  assume  that,  gen- 
erally speaking,  there  is  a  similarity  between  the  individual 
customer's  load  curve  and  the  load  curve  for  the  class,  and 
that  therefore  a  similar  K.  W.  H.  rate  applied  throughout 
the  class  would  be  approximately  just,  but  in  this  class  the 
Expediency  principle  becomes  a  powerful  factor  in  deciding 
the  proper  rate,  as  there  are  many  large  users  who  would  be 
driven  to  other  sources  of  power  if  charged  the  average  rat€ 
for  the  class.  The  enforcement  of  such  a  rate  might,  and  prob- 
ably would,  cause  a  very  appreciable  loss  in  volume  of  business, 
with  the  result  that  the  remaining  consumers  would  be  com- 
pelled to  pay  more  than  would  be  the  case  if  the  rates  were 
adjusted  to  meet  the  conditions. 

It  will,  therefore,  probably  be  found,  for  the  benefit  of  all, 
that  the  Company  be  allowed  to  charge  a  rate  in  some  cases 
higher  and  in  some  cases  lower  than  the  average  class  rate. 

MUNICIPAL  LIGHT. 

In  considering  the  rate  for  Municipal  lighting,  the  Com- 
mission is  confronted  with  the  existence  of  a  long-time  con- 
tract which  cannot  be  changed.  The  only  course,  then,  is,  if 
the  charge  is  found  too  high,  to  shift  the  surplus  return  to 
the  benefit  of  the  other  consumers.  If  the  rate  is  found 
to  be  too  low,  the  deficit  must  me  shouldered  by  the  other  con- 
sumers. 

It  is  seen  here  that  under  strict  regulation  it  is  to  the  disad- 
vantage of  the  general  consumer  for  the  City  to  pay  too  low 
a  rate  for  Municipal  light.  It  is,  however,  to  the  advantage 
of  the  taxpayer  that  City  obtain  as  low  rate  as  possible. 

BUSINESS  LIGHT. 

In  the  foregoing  classification  of  consumers  into  Residence, 
Power  and  Municipal,  it  has  been  assumed  with  what  seems 
^probable  correctness  that  the  load  curves  of  the  individual  con- 


I 


18 


Appendix   C 


Appendix   C 


19 


sumer  are  in  most  cases  approximately  parallel  to  the  class  load 
curve  and  that  therefore  the  application  of  the  class  rate  to  the 
individuals  (taking  Expediency  into  account  in  Power  rates) 
will  bring  about  rates  as  nearly  correct  as  can  be  expected  in 
dealing  with  a  subject  having  so  many  necessarily  neglected 
factors.  But  in  making  the  classification  which  we  call  Busi- 
ness Light  we  have  included  therein  all  consumers  other  than 
Residence,  Power  or  Municipal.  This  is  really  no  classifi- 
cation at  all,  and  the  average  rate  evolved  for  this  Business 
Light  class  is  merely  the  average  rate  for  the  balance  of  the 
business  after  deducting  that  of  the  first  three  classes  from  the 
whole. 

The  multiplicity  of  uses,  demands  and  conditions  included 
in  the  class,  and  the  very  meager  data  at  present  available  for 
determining  the  actual  peak  responsibility  of  the  different 
kinds  of  consumers,  prevents  the  application  to  the  individual 
of  the  average  class  rate  calculated  by  the  Cause  Theory  or 
peak  responsibility.  This  same  meagerness  of  data 
renders  the  division  of  the  Business  Light  consumers 
into  accurate  classification  as  to  peak  responsibility,  a  practical 
impossibility  beyond  a  few  rough  subdivisions. 

It  will  probably  be  possible  eventually  to  so  divide  Business 
Light  into  sub-classes  in  accordance  with  parallel  load  curve?* 
as  to  obtain  satisfactory  rate  calculations  under  Cause  Theory 
for  a  great  number  of  consumers,  but  to  carry  out  the  experi- 
ments necessary  for  obtaining  the  requisite  data  will  probably 
require  several  years'  time. 

In  applying  the  Use  Theory,  however,  we  have  all  the  neces- 
sary data,  for  in  this  calculation  the  individual  consumer  pays 
investment  charges  in  accordance  with  the  service  rendered 
him,  or  bv  his  K.  W.  H.  consumption  as  shown  by  his  meter 
readings.  But  while  this  calculation  may  be  correct  for  the 
individual  so  far  as  it  goes,  we  have  no  means  of  determining 
how  far  the  result  should  be  modified  by  his  peak  responsibility, 
i.  e.,  by  the  Cause  Theory. 

In  this  class  also  it  will  be  found  that  the  Expediency  Prin- 
ciple is  a  very  powerful  factor,  and  that  undoubtedly  if  a  strictly 
average  cost  to  serve  rate  were  adhered  to,  large  portions  of  the 
business  would  be  lost,  causing  in  the  end  an  increase  in  rate 
to  those  consumers  who  would  remain. 


1/ 


V 


"f    ■  7 


What,  then,  must  be  done,  for  the  problem  must  be  solved 
in  some  way? 

The  writer  would  suggest  that  after  eliminating  from  the 
class  certain  obviously  exceptional  sub-classes  the  Commission 
fix  a  maximum  class  rate  somewhat  above  the  average  class 
rate,  to  compensate  for  reduced  rates  made  to  meet  the  varying 
conditions  of  "expediency"  and  "cost  to  ser\^e."  From  this 
maximum  rate  for  the  class  such  variations  must  be  made,  by 
discounts  or  wholesale  prices,  as  may  seem  best  to  fit  the  exist- 
ing conditions;  having  always  in  mind  that  the  class  as  a 
whole  must  produce  the  amount  of  income  assigned  to  it  ii^ 
the  class  rate  calculation. 

WHOLESALE  RATES. 

In  the  former  report  on  Analysis  of  Rate  Calculations  the 
writer  has  taken  the  position  that  wholesale  rates  'per  se,  are 
not  justifiable  in  the  charges  of  a  public  service  corporation 
(see  page  38,  Report  August  25th,  1910),  and  that  differenti- 
ation of  rates  can  only  be  justified  on  the  "cost  to  serve"  or 
"expediency"  principles.  This  position  seems  theoretically  cor- 
rect. But  in  devising  some  plan  by  which  the  Company  may 
meet  the  existing  conditions  in  the  application  of  these  two 
principles  to  Power  and  to  Business  Light,  the  Commission 
finds  itself  confronted  with  the  alternative  of  allowing  rates  or 
contracts  to  be  made  especially  for  certain  individual  consum- 
ers, or  of  establishing  some  scheme  for  wholesale  rates  or  dis- 
counts to  roughly  meet  the  requirements  of  the  situation. 

It  seems  unavoidable,  then,  that  here,  as  at  many  other 
points  in  rate  making,  theory  must  be  sacrificed  somewhat  for 
the  sake  of  practical  results,  for  it  is  an  established  principle 
that  in  public  service  there  should  be  no  opportunity  for  per- 
sonal discrimination,  and  that  rates  and  schedules  should  be 
published  and  should  apply  to  any  or  all  consumers  who  com- 
ply with  the  conditions. 

Apparently,  about  the  only  possible  plan  for  meeting  this 
situation  is  by  some  system  of  wholesale  prices,  although  it  is 
evident  that  so  soon  as  we  institute  concessions  or  discounts 
on  account  of  quantity  alone  we  lose  sight  of  actual  "cost  to 

serve." 

We  can,  however,  obtain  some  guide  to  the  proper  applica- 


20 


Aptendix   C 


Appendix   C 


21 


tion  of  the  Expediency  principle  by  inquiring  what  low  prices 
must  be  established  to  prevent  power  and  light  of  large  con- 
sumers being  transferred  to  other  sources  than  the  central  sta- 
tion to  such  an  extent  as  to  injure  the  whole  body  of  the  remain- 
ing consumers. 

The  question,  to  a  great  extent,  is  to  determine  what  axe 
the  competing  sources  of  light  and  power,  at  what  quantity 
of  consumption  the  competition  begins,  what  prices  must  be 
made  to  meet  this  competition  and  at  what  point  it  is  to  the 
best  interest  of  the  consumers  as  a  whole  to  allow  the  business 
to  be  taken  from  the  central  station  company.  Data  on  these 
points  is  now  being  collected  for  the  Commission  and  will  be 
submitted  when  required. 

Having  fixed  these  competing  points  in  the  rates,  and  having 
decided  upon  the  quantity  of  consumption  at  which  they  be- 
come effective,  it  remains  to  make  such  compensating  allow- 
ance in  establishing  the  maximum  rate  as  will  insure  the  proper 
income  from  the  whole  class. 

The  writer  is  aware  that  the  study  of  this  and  the  former 
report  on  rate  calculations  shows  that  rate  making  is  not  an 
exact  science,  yet  a  review  of  the  conclusions  to  be  drawn  from 
both  reports  makes  it  apparent  that  certain  rates  may  be  calcu- 
lated with  at  least  approximate  accuracy  and  justice. 

Recapitulating  from  the  former  report  and  adding  conclus- 
ions to  be  drawn  from  present  report,  we  have  the  following : 

CONCLUSIONS. 

First :  Neither  the  Connected  Load  nor  the  Maximum  De- 
mand of  the  consumer  are  rational  factors  to  enter  into  Cost 
to  Serve  rate  calculations. 

Second :  If  the  Use  Theory  alone  is  applied,  the  Investment 
Charge  will  distribute  itself  into  a  level  K.  W.  H.  charge,  and 
the  only  differential  element  will  be  the  application  of  the  Cus- 
tomer Charge. 

Third :  There  is  at  present  no  practical  method  of  obtaining 
data  for  calculating  individual  Cost  to  Serve  rates  according 
to  the  Peak  Responsibility  or  Cause  Theory,  and  any  calcula- 
tion on  this  theory  must  be  based  upon  Class  Factors. 


9 


C/       1 

2 

i 

V 

1 

r 

r 

>  H 


Fourth  •  For  the  general  good  of  the  consumers  it  may  be 
necessary  to  modify  Cost  to  Serve  rates  on  the  Expediency 
principle. 

Fifth-  By  using  the  records  of  feeders  on  which  certain 
classes  or  portions  of  classes  have  been  segregated,  it  is  possible 
to  obtain  satisfactory  data  as  to  the  class  peak  responsibility  for 
some  classes. 

Sixth-     On   account  of  close  similarity  in  results  in   this 
ca^e  of  Cause  Theorv  calculation  and  Use  Theory  calculation^ 
there   is   no   great  difficulty   in   assigning   rates   taking  both 
theories  into  account. 

Seventh:  Customers'  Charge  is  an  exceedingly  important 
factor  in  establishing  residence  rates,  and  items  admitted  to 
the  charge  need  to  be  closely  scrutinized. 

Eighth :  In  Residence  Lighting  it  is  possible  to  reach  tol- 
erably accurate  results  under  both  Cause  Theory  and  Use 
Theory,  and  these  rates  are  justly  applicable  to  the  individual. 

Ninth :  Correct  Power  rates  can  be  calculated,  but  will  have 
to  be  adjusted  to  meet  "Expediency"  conditions. 

Tenth :  In  the  Business  Light  class.  Cause  Theory  rates  for 
the  variety  of  services  under  that  head  cannot  be  calculated 
closely  with  present  available  data,  but  Use  Theory  rates  must 
be  taken  as  a  base  to  work  from,  and  adjustments  made  ac- 
cording to  judgment  and  "expediency"  conditions. 

Respectfully  submitted, 

JAMES  E.  ALLISON, 

Commissioner  and  Chief  Engineer. 


I 


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St.  Louis.  Pub.  Serv.  Conm. 

Rept...on  rates  of  eleotiic  light 
and  power 


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END  OF 
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